Why Would You Remortgage? Key Reasons and Benefits

Remortgaging replaces an existing mortgage with a new one, often with a different lender, to secure new terms. This allows homeowners to adjust their loan in response to changing financial situations or market conditions, achieving various financial goals without selling their property.

Achieving Financial Savings

Securing a lower interest rate is a primary motivation for many homeowners to remortgage. Even a modest reduction can lead to substantial savings over the loan’s life, decreasing total interest paid and lowering monthly payments. Market conditions, such as fallen rates, or an improved credit score can make a more favorable rate possible.

Remortgaging can eliminate Private Mortgage Insurance (PMI). PMI is required on conventional loans when the initial down payment is less than 20% of the home’s value. Homeowners can request PMI removal once they have accumulated at least 20% equity, or when the loan balance reaches 78% of the original home value. Removing PMI reduces monthly housing costs, as PMI can add a significant amount to monthly payments.

Consider the closing costs associated with a remortgage, which range from 2% to 6% of the new loan amount. For example, refinancing a $200,000 mortgage could incur costs between $4,000 and $12,000. These costs include application, appraisal, credit report, and title insurance fees. Homeowners should calculate their “break-even point” to determine how long monthly savings will offset these upfront expenses.

Accessing Home Equity

A cash-out refinance allows homeowners to convert home equity into liquid funds. This involves taking a new mortgage for more than the current balance, with the difference paid to the homeowner. Lenders allow a maximum loan-to-value (LTV) ratio of 80% for conventional cash-out refinances, meaning borrowers must retain at least 20% equity. VA loans may allow higher LTVs, sometimes up to 100%.

Cash from a refinance can be used for debt consolidation. Homeowners can pay off higher-interest debts, such as credit card balances or personal loans, with lower-interest mortgage funds. This strategy simplifies monthly payments and reduces overall interest paid on consumer debt. Interest on the cash-out portion used for debt consolidation is not tax-deductible.

Accessed home equity is often utilized for home improvements, renovations, or additions. Funds spent on capital improvements, which increase the home’s value or extend its useful life, can allow the interest paid on that portion of the refinanced loan to be tax-deductible. This provides a tax advantage not available for personal expenses. Homeowners must maintain detailed records to substantiate these improvements for tax purposes.

Homeowners might use equity to fund major life events, such as college tuition or medical bills. While this provides financial flexibility, the mortgage is secured by the home, and failure to make payments could result in foreclosure. Proceeds from a cash-out refinance are not considered taxable income by the IRS.

Modifying Loan Terms and Structure

Remortgaging offers the opportunity to switch between loan types, such as converting an Adjustable-Rate Mortgage (ARM) to a Fixed-Rate Mortgage (FRM). An ARM’s interest rate can fluctuate after an initial fixed period, leading to unpredictable monthly payments. Switching to an FRM provides payment stability, as the interest rate remains constant. Some homeowners might refinance from an FRM to an ARM to benefit from lower introductory rates if they plan to sell before the ARM’s fixed-rate period ends.

Changing the loan term is another strategic reason for remortgaging. Homeowners can shorten their loan term, for instance, from 30 years to 15 years. This accelerates payoff and results in significant savings on total interest paid, though monthly payments will be higher. Conversely, extending the loan term, such as from 15 years to 30 years, can reduce monthly payments, though it leads to paying more interest over the longer term.

Remortgaging can facilitate the removal of a co-borrower from the mortgage, often necessary in situations like divorce or when one party wishes to transfer sole responsibility. The primary method is to refinance the mortgage into the name of the remaining individual. This requires the remaining borrower to qualify for the new loan independently, based on their income, credit score, and debt-to-income ratio.