mortgage refinancing: Find out how to refinance a mortgage at another bank, in which cases it is profitable, and in which it is the other way around, where to apply and what documents will be required.
What is mortgage refinancing?
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If you have taken out a mortgage, it is possible that at some point your bank or other credit institution will be able to offer better terms.
In this case, it makes sense to take out a new loan in order to pay off the debt to the bank ahead of schedule and pay the balance at a lower interest rate. This method of changing the terms of a loan is called refinancing.
Imagine the situation: you recently took out a mortgage, for example, at 9%, and suddenly found out that the mortgage rate has dropped to 6.5%. What to do? After all, you really want to get better conditions, and pay less! This desire is not at all difficult to fulfill – refinance your mortgage.
Refinancing, or “refinancing”, is one of the ways to improve the conditions on an existing loan.
Improvements can be different:
- lower rates and overpayments;
- increase in the term and decrease in payment;
- consolidation of several loans into one.
All methods are aimed at improving the financial situation.
The scheme is as follows: you draw up a new loan, and the bank in which you issued it transfers the money to close your existing (although almost non-current) mortgage to the bank where you issued the refinanced loan. The property will be pledged to a new lender.
Why do you need mortgage refinancing?
Refinancing your mortgage can help you lower your monthly payment or shorten your loan term.
How mortgage refinancing works
Unlike restructuring, when refinancing, a loan is issued with a new payment schedule. That is, you need to do almost everything that you did when applying for a mortgage.
- The first thing to consider, of course, is the potential cost savings.
- Then choose a bank, apply and wait for a decision.
- Finally, evaluate the approved conditions: how they match your expectations. If the savings are obvious, refinance.
Let’s take a closer look:
In the new bank, you will sign two agreements – a loan agreement and one for the transfer of an apartment as collateral. Then the new bank will transfer the money to the old one to close the existing loan. You will only receive money if you refinance with an additional amount for personal expenses.
How significant can savings be from refinancing?
At first glance, it may seem that a decrease of 1-2% is not very significant. But in the case of mortgages, even a small change in the interest rate can lead to huge savings.
For example, you took a loan for 15 years at 9% per annum to buy an apartment worth 3 million dollars. In this case, your monthly payment is 30.5 thousand dollars.
After 2 years, you have the opportunity to use a mortgage with a rate of 7.4% per annum. You can take out a loan for 13 years to pay off the balance, which by that time will be approximately 2.8 million dollars. The monthly payment will be reduced to 28 thousand dollars, and the total savings due to refinancing will be about 400 thousand dollars.
When to Refinance Your Mortgage
The first thing you should know is that it is profitable to refinance a mortgage if you have paid off less than 50% of the debt.
Most likely, your mortgage payments are annuity, i.e. fixed – the same at the beginning and at the end of the loan term. But their structure is different.
At the beginning of the term, the payment consists mainly of interest, and only a small proportion relates to the principal debt. As you repay the loan, the percentage in the payment structure decreases and the share of the principal debt increases.
Therefore, if you have already paid off more than half of the mortgage loan, then it is not so profitable for you to take a new one and start paying interest again.
If six months have not passed since the mortgage was issued, then you will not be approved for an on-lending application. We’ll have to wait a bit.
But if you have been paying off your mortgage for more than six months, it is difficult for you to cope with current payments, and the bank does not approve of restructuring, feel free to consider refinancing.
If you consistently pay your mortgage without experiencing difficulties, but want to improve conditions, study program options and start calculating.
First, look at the difference between the current and potential rates. If the difference is more than 1.5-2% – calculate the possible savings on the mortgage calculator.
How is refinancing a loan different from restructuring?
Borrowers often confuse the two. Refinancing occurs at the initiative of the bank’s client if he has found more favorable lending conditions. Refinancing does not affect credit history.
The bank resorts to restructuring at the request of the borrower when, for one reason or another, he cannot make regular payments on the loan. Restructuring has a negative impact on credit history, and in the future, if the borrower decides to take a loan, he will have to prove his solvency to the bank.
How many times can you refinance a mortgage?
The legislation does not prohibit refinancing a loan several times. But as a rule, banks do not allow resorting to this tool earlier than six months after receiving a loan.
Pros and Cons of Mortgage Refinancing
There are no downsides to refinancing. However, there are situations in which you should be more careful.
- More than half of the loan term has passed (interest has already been paid, so there is no point in taking a new loan to pay interest again),
- The difference between the potential and the current rate is less than 1.5% (taking into account all the costs, the savings on overpayment will not be very large, and besides, it will take a lot of time and effort).
Of course, refinancing requires some trouble: again, calculations, collection of documents and financial costs. But with the right calculation, the result will please you, because by lowering the rate you will save a considerable amount. And this is a definite plus!
Why can a bank refuse to refinance
Since refinancing is a new loan, and life situations often change, it is better to prepare for refusal in advance. Let’s see why banks refuse.
- One of the frequent reasons is not the first refinancing. Even loyal lenders are not always ready to re-lending.
- If your financial situation has not changed for the better and mortgage delinquency has begun, it is better not to waste time going to the bank. The application will most likely be refused if the current loan is being foreclosed. First, you will have to find funds to cover penalties, fines and late payments. When the situation improves, you can try to apply for refinancing. By the way, if you have debts for fines, alimony or utility bills, the risk of refusal is also high.
- The cost of the apartment could decrease due to market fluctuations, which means that its security capacity fell. That is, the collateral for the sale will not cover the debt to the bank if the borrower is no longer able to make payments. The bank will not accept such collateral.
- A new loan will be refused if redevelopment is not legalized in the apartment.
- Finally, the bank will most likely refuse to refinance if the co-borrowers are ex-spouses who continue to live in a mortgaged apartment, but have not formalized the division of living space according to the law.