The biggest difference between a remortgage and a refinance is in their names only — they are functionally the same concept. Whereas in the United States, the term is called “mortgage refinance,” in the United Kingdom and other countries, it’s called “remortgage.” There is a minor technical detail between the two — namely, a mortgage refinance usually implies the borrower found a new lender and a remortgage implies the borrower kept the original lender — but that difference is usually ignored when speaking to mortgage professionals and both terms mean the same thing: the borrower has replaced their current debt obligation (i.e., their loan, the mortgage) with another one (i.e., they are taking on a new loan).
There is a lot of confusion around these topics because lenders don’t do the best job of educating consumers or homeowners. This can lead to miscommunication and wasted time by homeowners looking to refinance their mortgage. This article will explain the difference between these concepts and hopefully help you choose the best refinance option for your needs.
Remortgage vs. refinancing
As discussed, the detailed definition of a remortgage is the process of settling one mortgage with the funds from another mortgage using the same lender. The main reason for switching these mortgages is to secure a better interest rate from a new lender.
On the other hand, refinancing refers to replacing a debt obligation using another debt, but using a new lender. Homeowners usually refinance to reduce repayment size, reduce the amount you pay monthly, consolidate other short-term loans or debts, and raise capital.
If you hear either of these terms used, be sure to clarify whether the speaker means keeping or switching lenders. Generally, they won’t intend any difference but some industry experts do rely on the difference to clarify the details.
When and why should I refinance my home
There are many ways to reduce the overall cost of owning a home. One of the easiest methods is to refinance. When you refinance a mortgage, you can receive a lower interest rate, allowing you to spend less every month. The factors to consider when choosing a mortgage include:
1. Loan length
Your borrowing ability is measured by how many years you can afford repayments without a dip into savings. You need to be realistic about your mortgage payments during this length of time and work out whether it’s affordable. For example, if you think that you won’t have enough money to make the payments each month, consider refinancing into a longer loan. Although, this does mean you will likely be spending more in interest payments over the long run.
2. Interest rate
The interest rate on an individual mortgage is unique to each person. This means that you could get a different rate depending on the lender and type of loan you choose. To ensure that your mortgage has the best interest rate possible, speak with multiple lenders. There’s no point in getting a high-interest rate loan if you can easily qualify for a much lower one. Changing interest rates is probably the most common reason homeowners refinance their mortgage.
3. Loan type
Most mortgages come in two types: fixed interest and variable interest. If you don’t plan to stay in your home for long, consider using a variable rate mortgage. This is because variable rate loans are usually lower, meaning you pay much less interest over the life of the loan.
Steps to refinance your home
Before you begin applying for a loan, there are several things you need to know about what your new payment will look like. For starters, your interest rate will change, which means that your monthly payment may be lower or higher, depending on your previous vs. new rate. Generally speaking, the refinance process looks like this:
- Figure out what are your refi goals (i.e., do you want to pull money from your home equity, or lower your monthly rate, or lower your interest rate, etc)
- Shop around (speak to many lenders, check online websites, ask your friends)
- Gather all your documents (pay stubs, 1099s, W2s, tax returns, bank statements)
- Get your home appraisal so you know how much money you can borrow
- Make sure your home is ready for an appraisal for your refinance.
- Apply for a refinance loan
- Read the items on your mortgage refinance loan estimate very carefully
- Close on your mortgage refinance! Congrats!
You might need to make certain comparisons between the costs of your existing mortgage vs. the costs associated with other products. If you’ve been thinking about refinancing, doing the math ahead of time will help minimize potential stress later on.
Disadvantages of mortgage refinancing
If you decide you need to remortgage, there are several drawbacks that you need to be aware of. These include:
1. Closing costs
Although it is not uncommon for traditional remortgages to have closing costs added to the loan’s total amount, refinancing may be subject to additional charges.
2. Mortgage insurance
As with any mortgage, you must pay mortgage insurance whether you choose to take a fixed or variable rate. The difference lies in the length of the policy period, the chosen rate, and the borrower’s ability to repay.
3. Payment penalties
Although rare today, you may face penalties if you decide to prepay your mortgage before its scheduled maturity date. Most prepayment penalties will generally apply only once per year, although if you’re prepaying within 30 days of the initial due date, you’ll typically incur an extra fee. These fees vary depending on the loan size and the penalty type.
Lenders commonly charge a 1% late fee, but this rate may increase if it’s your second violation within 12 months. In addition to the late fee, lenders impose a penalty for early payoff based upon a percentage of the remaining principal balance.
5. Tax liability
Your property tax bill may change if your home gets reassessed at any point through the refinance process. Therefore, you should check with your Assessor’s Office to determine if you still owe real estate taxes and what will happen to your current assessment.
Should I choose to refinance?
As discussed, a mortgage refinance and remortgage are essentially the same thing (just different words in different countries). That said, many industry experts will remind you that a refinance means you are choosing a new lender. Using that specific definition, the question of whether to stick with your current lender or switch lenders depends on several factors. These factors are discussed below.
1. Which lender provides a better rate?
If your current lender provides a better rate, you should continue to work with the same lender. However, if you shop around and find that there are more competitive rates in the open market, you should definitely consider using a new lender! You should also go back to your original lender with these new rates and see if they can beat it!
2. Which lender offers lower fees?
Most new loans include thousands of dollars worth of closing costs, regardless of whether you choose a new lender or stay with the original one. Make sure to get a full breakdown of all the costs, including details around what costs you can shop for and which are set (ie, government taxes, fees, etc). Without knowing the exact fees and closing costs, it’s hard to know which lender is providing the best deal.
3. Which is easier to work with?
If you are currently having an issue with your lender, refinancing to another lender may be the best option for you. Some of the lenders do not answer your questions regarding a mortgage. They even avoid answering your calls and emails, making things very hard. However, if you do not have any complaints with your lender, you might want to consider sticking with that lender or refinancing back to them if they are willing to offer you a better deal.
4. Which can close faster?
If you want to get out of your current home and need to close fast, refinancing can help make this happen. Keep in mind that the average closing time for a refinance is about 30 to 45 days.
Know the difference between remortgage and refinance
Refinancing and remortgaging can be a good idea for many homeowners. Not only can you get a lower interest rate, but your monthly payment may also decrease. However, before moving forward with a refinance or remortgage, you need to carefully consider the pros and cons of refinancing.
