Title:
How Remortgages
Work
Word Count:
596
Summary:
Everyone is
familiar with a mortgage, an industry term for a loan given to allow an
individual to purchase a home. If a
mortgage is a loan taken on the value of your home and the promise to pay a
monthly rate in the future.
Keywords:
loans,mortgage,remortgage
Article Body:
Everyone is
familiar with a mortgage, an industry term for a loan given to allow an
individual to purchase a home. If a
mortgage is a loan taken on the value of your home and the promise to pay a
monthly rate in the future, a remortgage is attaining a mortgage on your home
or property after you have already attained one.
Types of Remortgages
Remortgages come in a variety of arrangements and structures. The most common is a Standard Variable Rate
(SVR). A Standard Variable Rate is a remortgage where the interest floats upon
the market rate. Even under this
variable rate, however, the first few months are typically fixed below market
to entice you to take on the loan.
The other major type of remortgage is a Fixed Rate Mortgage. Fixed Rate
Mortgages differ from SVR’s insofar as the interest rate is determined and
remains flat from the beginning. This
type of loan is more dependable, insofar as you know exactly what your payments
will be from start to finish, but it is more risky in that you may end up
paying too much if rates fall (or too little if they rise). As a result of this increased risk, banks
typically charge a slightly higher rate for fixed rate remortgages.
There are also a wide variety of intermediary remortgaging options. Lending options like capped rate, tracker,
and droplock loans are all variations on remortgages which blend some aspects
of variable rate and fixed rate mortgages.
Reasons to Remortgage
Remortgages are in many ways identical to a mortgage. It involves you presenting your financial
situation, your need, and the collateral (your property) to a lender. Borrowers must convey a strong case for why
their loan is a good risk for the lender.
But unlike mortgages, where almost always the sole reason for the loan
is to enable you to purchase a home, the reasons for taking a remortgage are
quite varied.
Saving Money
The primary reason why individuals remortgage is to take advantage of lowering
interest rates. Many mortgage holders
can attain lower interest rates either because the prevailing interest rate has
falling across the lending industry, their personal credit and financial
situation has improved (meaning that lenders can now have more confidence in
them), or because the equity they have placed in their home has reduced the
total exposure of the loan and made the loan less risky for investors.
Raising Money
The second major reason why people remortgage their property is to raise
significant amounts of cash quickly. The
most popular method of doing this is through cash out refinancing. This essentially means attaining a new loan
for the full amount of your home. You
can then use the money that you attain through this loan to pay off the
remaining portion of your existing home loan and pocketing the difference.
Improving your Home
Another reason why people engage in remortgages is to free up some cash for
another venture. This typically involves
taking out a smaller loan against the value of your home, in effect a second
mortgage, which will give you money to improve your home.
Consolidate your Debts
The final major reason for remortgaging is to consolidate debts. Often borrowers have accumulated debts from a
variety of different sources, home mortgage, credit cards, car loans, etc. These loans can be difficult to keep up with
and many often carry high or varying interest rates. As a result many individuals find significant
savings as well as increased convenience in compiling all of these loans into a
single remortgage loan.