remortgaging- is it worth it? Any advice?

Yellow218 · October 2014

Hi all

Just a quick question about remortgaging. We were first time buyers when we bought our home, and at the time suspected interest rates to increase rapidly, we therefore went for a 5 year fixed term.Interest rates have increased but not a lot, but the value of our home has increased (accordingly to estimate websites- which when we looked at buying seemed to underestimate)

We are therefore considering remortgaging to reduce our monthly payments (Loan to Value ratio would have increased). I know we need to take into account the early repayment fee of our current mortgage, and the fees for the potential new mortgage, is there anything else we need to consider?

I would really value your advice/experiences on remortgaging.

als1982 · October 2014

How long do you plan on staying in this home?

Yellow218 · October 2014

10-15years i guess

Its our first home (that we own) but it'll be the family home

CuriousKiddosMama · October 2014

How much of your 5 years is left?
Do you have a balloon payment at the end, or is it a traditional 5 year fixed mortgage?
How much is the fee?
We just recast our mortgage (same 30 year term but we plan to pay in 10) but got the payment down after applying the cash from the sale of our last house. We are going to continue with the same payment unless we need that $ for emergencies. The we was also right or we never would have done it- it was free.
If you have just a couple years left, and there is no balloon payment I would honestly stick with it. Your mortgage was only for 5 years- most people finance a car that long. And after that you will have a completely paid for house! That would be something I would be willing to sacrifice for in the short term.

CuriousKiddosMama · October 2014

And I would not remortgage your house in order to afford fixing the bathroom quicker. It is something you will get to regardless of when you have kids. Kids create a mess as soon as they can move, so a construction mess
Just adds to that a bit- trust me I've been dealing with it for almost 2 months now. We moved into a house that was almost complete, and so I've had guys in and out ever week trying to finish it.
You do however need to get your credit cards paid off because you are forgetting about something as you charge to a 0% interest card- RISK! What happens to that interest if you miss a payment because one of you loses their job, or you get in an accident and can't work for 3 months? On your other post you said you were saving $ to pay off that card- quit saving and put the $ towards the balance. Get those paid off as quickly as possible, don't let them sit around. Do not refi your mortgage if you have early payment penalties- in the short amount of time you are taking about you would not get that plus your refi cost back out of the decrease in payment.
I am a Dave Ramsey follower as some others have already told you about. We don't believe in credit because there is risk involved in credit. And it is very peaceful knowing that my can will never disappear out of my driveway, and that my furniture is mine not somebody else's. It's also very peaceful having a paid for house- think about what you could do in cash with that house payment after its gone. You would have the money for your bathroom in no time. And if you have kids by then- hire it all done because you can afford to- in CASH!

hoffse · October 2014

Also look at the costs of re-mortgaging (the word we usually use is re-financing).

I think you mentioned a "nappy list" in a previous post. Are you living in the UK or Australia? If so, our advice can only be generic. Mortgage deals vary a lot in different countries, and most of the posters on this board are American.

If you are in the US, there are deals to be had for low closing cost re-fi's. It does depend on your credit, and it takes some serious shopping around to find them. Regardless of whether you find a low-cost refi deal or not, you will likely be paying for the property to be re-appraised, your credit report pulled, etc. There's a pretty good chance you'll have to pay a new origination fee on the loan which can be several thousand. We had our origination waived because the bank was a client of my firm's... but we were still charged an $800 "administrative fee."

Yes, re-fi's can save you a ton of money over time, but you really need to crunch the numbers to see if the closing costs work out to be less than what you are saving in monthly payments for the rest of the time you expect to be in that house. Often times a refi doesn't make sense financially.

Also keep in mind that until your house is professionally appraised by an appraiser selected by the bank, you are just guessing at its new value.

Yellow218 · October 2014

Hi all

Vikings fan- I appreciate I have posted two subjects, but they are separate. Irrevalant of whether we do the bathroom or not we are considering re-mortgaging (I'm from the UK).

The mortgage is a 30 year term, with an initial period of 5 years fixed interest rate.

Ie the amount we borrowed is spread over the 30 years (with the interest), the interest rate is fixed for the first five years, but after that it would go to a variable rate.(which usually goes sky high)

Most people take the opportunity to search the financial market close to this point to 're-mortgage'. i.e. find another fixed rate mortgage. I have read our documentation, and there is a early repayment charge (goes from 5% of outstanding balance in the first year, to 1 % of balance in year 5). After which there is no fee.

Come 1st November 2014 will we be in the 3rd year, i.e. have to pay 3% fee to repay early. However our monthly repayments would reduce by 40%. Having added in all the fees(early repayment, valuation and admin) it looks like we would save $6500 over the next three years.

So it might actually be worth doing.....plus yes, hidden bonus that would cover the cost of the bathroom easily!

But i wondered whether there is anything I am missing.

Xstatic3333 · October 2014

In the UK are 30-year fixed rate mortgages an option out of curiosity? They are common in the US and most of us prefer them for the security of knowing our payments won't change (many do 15-year fixed rate, too).

blondie42107 · October 2014

I'm thinking you should speak with your mortgage company to see what refinancing will include for you. If you have a high interest rate or you suddenly have a big jump in home value, then it might be worth it.

We refinanced our home from a 30 year fixed to a 15 year fixed and also lowered our interest rate. Our mortgage company waived the appraisal. Overall it was very low cost refi for us.

Every mortgage is different so you really need to understand specifics for your loan.

Yellow218 · October 2014

wow fixing for 30yrs---i've never come across anything that long, longest I've seen is 5yrs fixed(thats why we took it). When speaking with friends and family it seems most like to go for a 2/3 year fixed, but I guess it all depends on circumstances. Like you say, its nice having a consistent payment.

The loan is over 30 years, but for rate is fixed for the initial 5 after which it becomes variable which is why most people re-mortgage when their initial period ends as it is usually better financially to go to another fixed mortgage rather than staying on the variable.

I think the right step for us is to get an idea of the cost of the house then we can see what re mortgage products are available and whether the savings outweigh the early repayment and admin fees. There are many agents at the moment offering free surveys. Although I appreciate the mortgage supplier will likely be a bit lower in their estimation it'll give us a better idea than just relying on zoopla (Which uses sales in the local area to estimate the price of your property!).

Thanks ladies.

hoffse · October 2014

Yellow218 said:

Hi all

Vikings fan- I appreciate I have posted two subjects, but they are separate. Irrevalant of whether we do the bathroom or not we are considering re-mortgaging (I'm from the UK).

The mortgage is a 30 year term, with an initial period of 5 years fixed interest rate.
Ie the amount we borrowed is spread over the 30 years (with the interest), the interest rate is fixed for the first five years, but after that it would go to a variable rate.(which usually goes sky high)

Most people take the opportunity to search the financial market close to this point to 're-mortgage'. i.e. find another fixed rate mortgage. I have read our documentation, and there is a early repayment charge (goes from 5% of outstanding balance in the first year, to 1 % of balance in year 5). After which there is no fee.
Come 1st November 2014 will we be in the 3rd year, i.e. have to pay 3% fee to repay early. However our monthly repayments would reduce by 40%. Having added in all the fees(early repayment, valuation and admin) it looks like we would save $6500 over the next three years.

So it might actually be worth doing.....plus yes, hidden bonus that would cover the cost of the bathroom easily!

But i wondered whether there is anything I am missing.

OK I'm not from the UK, but it seems to me like you are assuming a lot here. My thoughts:

1) I would absolutely not pay a 3% penalty to refi. That's a huge waste of money that simply goes away if you just wait.

2) What you are describing sounds like a 5/1 ARM. You should check and see if there is an annual adjustment cap. In the US, most ARMs have an adjustment cap so they can't go up more than x% per year.

3) 5/1 ARMs were one of the loan products that caused the housing market to bust back in 2008 because people signed up for them and then conveniently forgot about the adjustment period when budgeting for their mortgage. Just saying.

4) You say your payments will go down 40%. How? Even if you've added a ton of value to your house, you are only 3 years into repaying your 30 year loan. That loan has to be paid back. I'm sorry, but I don't understand this math.

5) You have no idea how much value you have added to your house. Maybe the UK is different, but no American bank that's worth anything would take a homeowner's word on the value of their home. They would require a professional appraisal. I feel like the UK is probably the same, given that UK banks basically invented debt financing.

Xstatic3333 · October 2014

Yellow218 said:
wow fixing for 30yrs---i've never come across anything that long, longest I've seen is 5yrs fixed(thats why we took it). When speaking with friends and family it seems most like to go for a 2/3 year fixed, but I guess it all depends on circumstances. Like you say, its nice having a consistent payment.

The loan is over 30 years, but for rate is fixed for the initial 5 after which it becomes variable which is why most people re-mortgage when their initial period ends as it is usually better financially to go to another fixed mortgage rather than staying on the variable.

I think the right step for us is to get an idea of the cost of the house then we can see what re mortgage products are available and whether the savings outweigh the early repayment and admin fees. There are many agents at the moment offering free surveys. Although I appreciate the mortgage supplier will likely be a bit lower in their estimation it'll give us a better idea than just relying on zoopla (Which uses sales in the local area to estimate the price of your property!).

Thanks ladies.

Wow that's very different that all mortgages are adjustable rate! Here 30-year fixed is very common-probably the most common type of mortgage. Do people generally just refinance every 5 years is perpetuity? I know it's off topic I'm just curious.

Yellow218 · October 2014

Yes I understand that there are differences between the USA and UK- so my fault for using an american site. Im sorry but I don't know anything about ARMs (other than I have two coming off my shoulders!

)

There are many mortgages available, but having 30yr fixes just aren't the sort of thing thats around in the UK- to an extent I am stuck with what is available but will also utilise it if it means I am financially better off.

Let me try to explain.

I bought my home for 235,000. I had a 10% deposit so needed a loan of 211,500. This is a value to loan (LTV) ratio of 90%. I was 25 when I took out my mortgage so likely to (unfortunately work for another 30 years) hence the length of mortgage. The interest rate is calculated based on the LTV. At 90% the interest rate is higher than a lower LTV ratio. My monthly payments (included repayment and interest) are 1039. I have 35 months left of the initial 5 years so this will cost me 36374. At the 5 yr mark it is HIGHLY likely i will need to remortgage any way and usually rates rocket after the introductory period. ( I guess by the time you get closer to retirement the amount you save isn't worth the hassle so maybe people do not keep on remortgaging every 5 years, but I know my friends and family still do).

At this 5 yr point there will not be any early repayment fee but will still be admin and valuations fees. What I am trying to see is, overall, including the fees, is it in my interest to remortgage now, or wait it out until the 5 year mark.

Now. According to Zoopla my home is now worth 312,425. and I have paid off some of my mortgage (I still have 207000 left to pay). However if I was to remortgage based on the new revaluation of my home then my LTV would be 66% meaning the interest rate is lower.) I have gone on comparison sites and used these figures, after they do their sums it comes up with a monthly repayment charge of 721, so if I were to remortgage today this would mean 35 payments of 721= 25235. (36374-25235=11,138 . Ok i over estimated when I said I could save 40% a month, looks like its 30%. Yes there are some one off charges, which totals 8106, but over the next three years it would mean in total I am (11,138-8106)=3032 better off over the next three years.

£3032 is about $4900 apparently.

Hands up, I admit i over estimated and underestimated in some areas. And yes of course I am (at this stage) making assumptions. But to an extent you do need to make assumptions initially to see if it is worth looking into further. I guess, these assumptions and estimations are saying to me that yes it is likely to be worth doing- it'll save me just under 3 months of payments over the next three years.

Of course the bank will want to do its on valuation survey rather than take my word (and its not my word- Im using zoopla which uses governance data to estimate the value of you home on the assumption of no additional improvements.)

Making sense?

Yellow218 · October 2014

Bottom line. I will save money if I remortgage (depending on the valuation of my home). And on current estimates it looks like id save enough for good contribution to

1) pay off some of those 0% CC

2) or a decent 'nappy list' holiday

3) or some home improvements

Ahhh choices

hoffse · October 2014

None of this is any different than how it works in the US except for the lack of a 30-year fixed option in the UK

A 5/1 ARM simply means that the rate is fixed for 5 years, then adjusts once a year EVERY year for the rest of the loan. This is what you are describing. Perhaps they call it something different in the UK.

I'm just baffled by the interest rate, I guess. What you are talking about really doesn't make sense.

The LTV of the house only matters to the extent that it lowers the interest rate (usually by a percentage or so) and to the extent that it might allow you to drop private mortgage insurance if you have it. But still... a 30% drop in monthly payments mathematically makes no sense unless you are getting an absolutely outrageous interest rate.

It looks like you are paying - right now - about $1,040/month. That means your current interest rate is about 4.25% by my calculations. That's a good rate these days.

But here's where I'm not understanding things. It doesn't really matter what the LTV is on your house is. You still owe $207,000. That $207,000 MUST be paid off with another loan equal to or greater than $207,000.

To make your monthly payments $721/month, you would have to be getting like a 1.5% interest rate. Today, LIBOR (which is a London-based rate) is right at 1% for 12-month loans in GBP. In other words, that's the WHOLESALE rate that banks can buy money from each other today. LIBOR is used in business transactions often - and even then, the rates (which are often below mortgage rates) are LIBOR+some percentage.

Sorry, but I don't think you're going to be finding a 1.5% rate for a mortgage when banks are paying 1% wholesale.

If you really can find a rate that low, then by all means take it. In the US, a 1.5% rate is slightly lower than the rate of inflation, and that would essentially be free money.

Also? I would at least wait until you aren't going to be paying pre-payment penalties. You are talking about spending $6210 in prepayment penalities (which is 3% of $207,000) to pay this mortgage off early.... combined with the current balance on your mortgage, that's MORE than what you borrowed to begin with. That makes absolutely no financial sense.

hoffse · October 2014

Also? Stop using online estimators. They are worthless.

The only way to know the actual market value of your house is to have it appraised by a professional/licensed appraiser. The only way to know what interest rate you are eligible for is to call a bank, give them details, and let them give you a quote.

Property estimators are useless. Zillow says that my parents' house is worth $350,000 and has 0 bedrooms and 0 bathrooms. I can assure you that at least part of that is wrong.

brij2006 · October 2014

What are the current interest rates at if you were to remortgage?

Also, would you be remortgaging into another 5 year rate that is variable afterward?

oneplusoneistwo · October 2014

It sounds like you are refinancing for another 30 year term, of course your monthly payments will go down, you are adding on 2+ more years to your loan. You aren't saving 3,032, you are paying an extra 14,272 over the life of the loan, most likely more since it will be variable again after 5 years. I would stick it out the 5 years, not pay any penalties, and refinance into a 25 year loan in 5 years, and after that a 20 year loan, then 15, etc. If you keep refinancing to a 30 year loan every 5 years (or less) you are wasting A TON of money on interest (and fees). When you are considering the cost of a 30 year loan, you have to look at the whole 30 years, not the next 35 months.

ETA: Just realized my math is bad above, but the point still stands.

blondie42107 · October 2014

Yellow218 said:
Yes I understand that there are differences between the USA and UK- so my fault for using an american site. Im sorry but I don't know anything about ARMs (other than I have two coming off my ! )

There are many mortgages available, but having 30yr fixes just aren't the sort of thing thats around in the UK- to an extent I am stuck with what is available but will also utilise it if it means I am financially better off.

Let me try to explain.

I bought my home for 235,000. I had a 10% deposit so needed a loan of 211,500. This is a value to loan (LTV) ratio of 90%. I was 25 when I took out my mortgage so likely to (unfortunately work for another 30 years) hence the length of mortgage. The interest rate is calculated based on the LTV. At 90% the interest rate is higher than a lower LTV ratio. My monthly payments (included repayment and interest) are 1039. I have 35 months left of the initial 5 years so this will cost me 36374. At the 5 yr mark it is HIGHLY likely i will need to remortgage any way and usually rates rocket after the introductory period. ( I guess by the time you get closer to retirement the amount you save isn't worth the hassle so maybe people do not keep on remortgaging every 5 years, but I know my friends and family still do).

At this 5 yr point there will not be any early repayment fee but will still be admin and valuations fees. What I am trying to see is, overall, including the fees, is it in my interest to remortgage now, or wait it out until the 5 year mark.

Now. According to Zoopla my home is now worth 312,425. and I have paid off some of my mortgage (I still have 207000 left to pay). However if I was to remortgage based on the new revaluation of my home then my LTV would be 66% meaning the interest rate is lower.) I have gone on comparison sites and used these figures, after they do their sums it comes up with a monthly repayment charge of 721, so if I were to remortgage today this would mean 35 payments of 721= 25235. (36374-25235=11,138 . Ok i over estimated when I said I could save 40% a month, looks like its 30%. Yes there are some one off charges, which totals 8106, but over the next three years it would mean in total I am (11,138-8106)=3032 better off over the next three years.

£3032 is about $4900 apparently.

Hands up, I admit i over estimated and underestimated in some areas. And yes of course I am (at this stage) making assumptions. But to an extent you do need to make assumptions initially to see if it is worth looking into further. I guess, these assumptions and estimations are saying to me that yes it is likely to be worth doing- it'll save me just under 3 months of payments over the next three years.

Of course the bank will want to do its on valuation survey rather than take my word (and its not my word- Im using zoopla which uses governance data to estimate the value of you home on the assumption of no additional improvements.)

Making sense?

I have no idea how your house's value has increased over $75,000 in three years... Your source for estimating doesn't sound very valid. You'd probably be better off looking at comps in your neighborhood.

Yellow218 · October 2014

the estimate IS based on recent sales in the area.

House prices are increasing quickly at the moment. plus we have improved it a lot.

Added

-off road parking

-double garage (in addition to the parking)

- added a down stairs bathroom

-central heating

-double glazing

Improved

- decoration throughout (expect main bathroom)

- renovated kitchen (completely new design and layout.)

- re-wiring

Xstatic3333 · October 2014

Some of those additions would add a ton of value, especially adding a garage and bathroom.

I'd say that since you've done some estimating and are very eager to move forward, just have a professional valuation done. Triple-crunch the numbers that come from that and then decide what to do.

I think our hesitation on the valuation comes from the fact that we have a website, Zillow, that gives super-inaccurate appraisal estimates. Mine (bought very recently) was off by about 10%, and they usually skew high. Hopefully Zoopla is closer and you get the appraisal you're hoping for!

remortgaging- is it worth it? Any advice?

Re: remortgaging- is it worth it? Any advice?

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