In simple terms, refinancing involves replacing the existing loan with a new one. Refinancing a property is a sound financial move to pay off the original mortgage loan and take out a new loan or consolidate the debt. The process of refinancing is pretty similar to the traditional mortgage process. Here is a step-by-step guide to refinance a mortgage.
Access Your Financial Situation
The criteria for refinancing a mortgage are largely the same as a new mortgage loan. Mortgage lenders will factor in several considerations including credit score, income, payment history on existing debt, the value of the property, and other debt obligations. If you meet the eligibility criteria, you may get approved for a new loan on better terms.
There are tons of mortgage lenders in the UK, do not hesitate to shop around, and research the pre-approval processes of different lenders. Compare the refinance offers based on interest rates, rate type, and loan terms to make the right move.
Submit The Application
Once you have found a better deal, submit an application with the lender providing all the information about yourself, the value of the property, and the existing mortgage loan. Provide evidence and documentation in support of your refinancing application.
Get the Loan
If the lender approves you for a new loan, the property owner will be asked to sign the paperwork. The lender will pay off the existing mortgage and open an account for the new loan.
Benefits of Refinancing a Mortgage
The mortgage market continues to evolve, and new deals become available to get loans at better interest rates. Property owners benefit from the new deals to save hundreds of pounds. Here's why you should consider refinancing:
- Lower Interest Rates – The market rates continue to change; therefore, it is worthwhile to see if there is a new mortgage deal available with lower interest rates and monthly payments. The homeowner can get a better interest rate if their credit score has improved.
- Change the Mortgage Term – With new deals, the homeowner can qualify for lower interest rates if they shorten the loan term, however, it would be equivalent to higher monthly payments. In the case of a longer loan term, the monthly payments will be lower.
- Change Rate Type – Refinancing allows you to switch the rate type, for instance, from an adjustable rate to a fixed rate to avoid the influence of market fluctuations.
- Pay off Debt – If the property owner has a lot of debt, getting a favourable mortgage deal with a longer term will help him pay off the existing debt.
Drawbacks of Refinancing a Mortgage
- Lengthening the loan term means paying more money on interest over the life of the loan.
- The property owner may have to pay higher monthly payments for a shorter loan term.
- Market fluctuations could result in getting a new loan on unfavourable terms and higher interest rates.
- Missing payments on the original mortgage loan can affect the credit score.
It is important to understand where you stand and access your financial situation before applying for a refinancing loan.