Note From Kalen: Any time you talk about refinancing or remortgaging (as known in the UK), you have to look at every angle, and make sure you make an informed decision. This post covers some of the basics, but always do your own research before a decision like this. Enjoy!
Finding yourself overwhelmed by debt can make daily life quite challenging. You just want the debt to go away. But it won’t; you are going to have to pay it one way or the other. Sometimes remortgaging is the right solution. Working with a mortgage broker could be the key. Check out the themortgagebrokerltd website to learn more about mortgage brokers.
That aside, a remortgage could put extra money in your pocket while also saving you money on your house payments at the same time. The extra cash can be put toward retiring higher interest debt that is essentially consolidated into your mortgage payment.
Remortgaging is not the right solution for every debt problem. There is a lot that goes into making sure you actually save money this way. But if things can be worked out to your advantage, remortgaging can both improve your financial position and your credit report.
Using the Equity in Your Home
Remortgaging to consolidate debt rests on the principle of accessing equity. Getting a new mortgage for an amount higher than what you actually owe allows you to ‘cash out’ the equity in your home, if you will, and use the cash for other things.
What is equity? It is the difference between the current value of your home as compared to how much you still owe on your mortgage. Let’s say your house is valued at £200,000. You still owe £100,000, creating a difference of £100,000. That amount is your equity. You could cash out a portion of that equity by remortgaging for an amount higher than what you owe.
There are a number of advantages to consolidating debt this way. First and foremost, your equity is worthless to you for as long as you are sitting in a house on which you still owe money. That equity represents a line of credit you can tap into. So why not do so? It makes more sense to use your equity to pay down expensive debt than turning to something like a credit card.
Remember that credit cards are usually limited to smaller amounts. Personal loans are limited as well. So if your outstanding debt is more than your current credit cards and personal loans can cover, what do you do? Securing additional credit cards is probably not the best course of action.
Working Through a Mortgage Broker
It cannot be stressed enough that remortgaging in order to consolidate debt is not right for every situation. There are times when remortgaging could actually cost more. For example, if you only have five years left on your current mortgage and you are looking to remortgage at 15 years to consolidate debt, you will pay more than if you just continued as-is and then put your monthly payments toward debt relief once your house is completely paid off.
The point here is to help you understand that working through a mortgage broker is your best bet if you intend to remortgage. A mortgage broker will not only help you find a good deal, he or she can also advise you on the best course of action for remortgaging.
A good mortgage broker can help you understand whether or not you are actually going to save money by remortgaging. He/she can lay it all out in real numbers, showing exactly how much interest you will pay, what the fees and charges will be, and how much a particular solution will cost you when all is said and done.
You are not going to get that kind of assistance from a bank. Your bank’s loan officer is not going to sit down with you and calculate the differences between five or six different deals in order to help you decide on the best one. He or she is not going to advise you as to the financial viability of remortgaging as opposed to other debt reduction strategies.
Remortgaging and Your Credit Score
There’s one last thing to address before closing this post: your credit score. A consumer’s credit score is determined through a complex formula that accounts for total debt load, debt-to-credit ratio, the types of loans still outstanding, timeliness of payments, etc.
If your current indebtedness is so overwhelming that you cannot make your payments on time, you can bet that late payments are hurting your credit score. If there is one thing that lenders look for, it is a borrower’s ability to make payments on time. This is one area where remortgaging can help.
The right kind of deal could reduce the total amount of money you are paying out every month. And because your mortgage is always due on the same day of the month, it is easier to budget for. The combination of both factors could be instrumental in helping get back to making timely payments and, subsequently, improve your credit score.
If you find yourself overwhelmed by debt and you have enough equity in your home, remortgaging might be the best way to sell that debt. Just do yourself a favour and be cautious. Do not just jump into a remortgage solution. Instead, work with a mortgage broker who can help you make sense of it all.