If you pay off one mortgage loan with money coming from another mortgage loan, using the same real estate as collateral, this is known as remortgaging. It is a form of debt refinancing.
The term remortgaging is chiefly heard in countries such as the United States where the standard homeowners’ mortgage loan come with a fixed interest rate for the duration of the loan (FRM loan). When homeowners wants to get the interest rate down, they can’t simply re-negotiate the interest rate for the existing loan. Instead, they must first negotiate a new mortgage loan with a lower interest rate, and then use the money from that loan to repay the old high-interest mortgage loan.
If you have a mortgage loan with an adjustable interest rate (ARM loan) instead of any FRM loan, you don’t have to jump through these hoops. You simply renegotiate the interest rate for your current mortgage loan.
Must I move to another lender?
One common way of remortgaging is to find a new lender that is offering a better interest rate than the old lender, and use the mortgage loan from this new lender to repay the old mortgage loan. However, there are many examples of homeowners who have remortgaged without switching lender. Most lenders will prefer to give you a new loan with a better interest rate than to lose you to another lender. By sticking to the same lender, you can also expect the process of remortgaging to be quicker and less cumbersome since you are already a client and there is no other lender involved. There may also be certain fees that you don’t have to pay since you aren’t closing a mortgage loan with one lender and opening a new mortgage loan with another one.
Of course, remortgaging doesn’t have to be about interest rate and fees. Sometimes homeowners will remortgage for other reasons. They may for instance dislike the old lender because of bad customer service and wish to move to another lender because of this. It can also be about becoming a full-service client with a bank that is offering something that the homeowner wants and can’t get from the old lender, such as a favorable unsecured loan or an investment account with low commission costs.
Some puritans will claim that it isn’t a real remortgaging if you stay with the same lender, but this is just mincing words. You are paying off an old mortgage loan with money form a new mortgage loan, and you are using the same property as collateral. The rest is just semantics.
Examples of reasons to remortage
- To get the interest rate down in order to bring your monthly payments down.
- To get the interest rate down, but keep the monthly payments at the same level as before, so that you are paying off the principal quicker than before now that less of the monthly payment is interest.
- To reduce costs that aren’t interest, e.g. billing fees, annual fixed-fees, etc.
- To move from one lender to another, for whatever reason.
- To switch from a fixed-rate mortgage loan to an adjustable-rate mortgage loan, or vice versa.
- Remortgaging instead of getting a second mortgage loan
Remortgaging as an alternative to a second mortgage
Even though the new mortgage loan you obtain when you remortgage may very well be the second mortgage loan of your life, the term second mortgage is usually reserved for something else – a mortgage loan that you get on a property that is already collateral for an older mortgage loan.
The second mortgage loan will be subordinate to the first mortgage loan, which means that the first mortgage loan lender has priority. When the real estate is sold, the first mortgage loan must be paid off in full before any money can go towards paying off the second mortgage loan.
Because of this, lenders are more restrictive when it comes to approving second mortgage loans, and when they do approve them, it is usually with a higher interest rate than for the first mortgage. You may find yourself in a situation where your application for a second mortgage is denied, but you are offered to remortgage instead, or where remortgaging is the best solution to keep the interest rate down.
Example: Eric has a $540,000 mortgage loan with his home as collateral. He now wants to borrow $75,000 to renovate his home. His current lender Bank A denies his application for a second mortgage, so Eric contacts another bank, Bank B. Bank B is willing to lend Eric money, but they don’t want it to be in the form of a second mortgage loan, since that would mean that they would be in a worse position than Bank A. Instead, they offer Eric a $615,000 mortgage loan, provided that he pays off his old mortgage loan with Bank A. Eric accepts. His $540,000 mortgage loan with Bank A is paid off, and he now has a $615,000 first mortgage loan with Bank B. Eric remortgaged instead of getting a second mortgage.
If you have a first mortgage loan and a second mortgage loan on a property, refinancing the first mortgage only can be a bit complicated. It is up to the second mortgage loan lender to approve or deny your subordination request, i.e. to let the new first lender step into the old first lenders’ position when it comes to priority.
Do not remortgage without negotiating the terms and conditions
How much you can lower the interest rate (or other costs) on your mortgage loan by remortgaging will depend on several factors.
For starters, the currently available interest rate for mortgage loans similar to the one you have will of course be a factor to consider. If you for example signed for a fixed-rate mortgage loan when 5% interest rate was considered normal, you should definitely consider remortgaging if similar mortgage loans are offered with a 2% interest rate nowadays.
How hard you can negotiate will depend on how eager your counterpart is to have you as a client, and this will in turn chiefly depend on your creditworthiness and how “hungry” your counterpart is when it comes to obtaining new clients or retaining old ones.
Below you can read their best to tips about what you sh that can make it easier for you to obtain really good terms and conditions when remortgaging:
- Good credit report
- High credit score (in countries where credit scores are used. Visit a website in your language to learn about how credit scores and mortgages work in your country. If you are Norwegian you should search for info about boliglån, if you Swedish for bolån and so on. )
- Solid employment history
- A low loan-to-value ratio for the real estate that will be used as collateral
- Low overall debt-to-income ratio for you
If you are married or have a live-in spouse, his or her financial situation can influence the lenders’ assessment of your creditworthiness (for good or for bad). Having underage children or other dependents is also a factor that can be taken into account.
Costs associated with remortgaging
There are costs associated with remortgaging and these should be taken into consideration when you make your decision. In some cases, you may even be able to negotiate them down as a part of the negotiation process. Costs can come from both the old lender and the new lender, and even remortgaging without changing lender can incur costs for the borrower.
If you are moving from one lender to another, costs charged by the old lender can actually be something that you should bring up when you negotiate with the new lender. They wont be able to do anything about them, but they might be able to lower some of their own fees to compensate you for the old-lender fees – if they are eager enough to have you as a client. After all, you wont go through with this remortgaging if it isn’t beneficial for you. If large old-lender fees are eating up your benefits, going through with the remortgaging becomes less appealing from your perspective.
Examples of fees to look out for:
- Exit fee (old lender)
- Application fee (new lender)
- Fees associated with your new lender having your real estate appraised, checking that you are actually the owner, checking liens, etc
Also keep in mind that the new lender might have other requirements than the old lender when it comes to mandatory home insurance.