How Does Refinancing Work?

November 8, 2018 by Chris Golledge

How does refinancing work and when should you refinance?

Refinancing is when you take out a new mortgage to replace your existing one. The first loan is paid off, allowing the second loan to be produced, this is done to allow you to obtain a better interest rate and ideally reduce monthly payments. The mortgage refinancing process is pretty much the same as when you first apply for a mortgage. It is ideal to speak with a mortgage advisor to explore your options. A mortgage advisor can help you with the whole process from start to finish, making it less daunting and time consuming for most people. Additionally, refinancing gives you the opportunity to raise extra capital for home improvements, debt consolidation or deposit towards a
new purchase.

You should ideally start looking into refinancing 3-4 months prior to the product expiry date (expiry date detailed on the mortgage offer) to avoid going onto a standard variable rate. A typical re-mortgage application can take between 2-4 weeks to offer and 2-4 weeks for the solicitors to conduct searches and complete paperwork. These timeframes can fluctuate depending on individual circumstances.

What are the advantages of Refinancing?

One of the main advantages of refinancing is to obtain a better interest rate and reduce monthly payments. Very often as you work through your career you start to earn more and are more likely to stay on top of your finances and improve your overall credit score. Therefore you maybe in a better position to look at lower interest rate products. For borrowers with a perfect credit history and substantial income, refinancing can be a good way to convert a variable loan rate to a fixed rate. Another advantage of refinancing is having the opportunity to release equity from your home for additional cash.

What are the disadvantages of Refinancing?

If you are someone with less than perfect, or even bad credit, or too much debt, refinancing can be risky and difficult. Many mainstream lenders will not consider individuals with missed payments or adverse credit. However there are some less mainstream lenders with much higher interest rates who are more lenient with such scenarios. Other disadvantages are that refinancing can have additional fees such as lenders fee, valuation and broker fees, which may counter any of the benefits received from negotiating a lower rate.

Does refinancing hurt my credit score?

Many lenders use a ‘soft print’ when carrying out a credit search on your mortgage application, therefore it does not impact your credit score. A soft credit check is an initial look at certain information on your credit report. Nonetheless, numerous credit searches can leave a ‘hard print’ and contribute to a much bigger impact on your overall credit score. Most hard searches will stay on your credit report for around 12 months.

Author – Kira Heidari Mortgage Broker 09/11/18

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