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Preparing to remortgage your home loan

Nearly half of all mortgage applications are for remortgages. If you are considering remortgaging your home loan, here are some things you can do to get ready:

1. Check the current interest rates.

Traditional wisdom says you should remortgage your home if the interest rate drops at least two percentage points lower than your current interest rate.

However, if the current interest rate is only 1% or 1.5% less than your current interest rate, you can still save money over the term of your mortgage. You want your interest rate to go down by at least 5/8%, or you won't save enough money to be worth the cost of remortgaging.

2. Consider how long you plan to stay in your home.

The interest rate is not the only factor you should consider when deciding whether go for a remortgage.

Keep in mind how long you plan to stay in your home. You need to stay put long enough to recover the costs of remortgaging.

If your new interest rate is 1.5% less than your current interest rate, you generally need to stay in your home more than three years to make the remortgage worth the fees.

3. Check your credit rating.

Check your credit rating before you filling out any remortgage applications. If there are any problems with your credit, you can take a little time to fix them before proceeding. This is especially true if there are out-of-date or incorrect entries on your credit report.

It's a bit of a chore to send off the letters and keep up the correspondence, but if someone were to say they'd give you a grand to do it (i.e. the amount you might save with a better deal), you'd do it!

4. Check the value of your home.

You will need to have your home appraised. But for now, just check the selling price of similar homes in your area. Has the value of your home gone up or down since you bought it?

5. Decide if you want to use the equity in your home to get cash out.

If the value of your home has gone up, you can remortgage for a higher amount than what you owe, and get cash out for school, vacation, home improvements, or to start a new business.

For myself, I'd only use such money to set up something that would make money, or to fund a child's education; it's much better for your peace of mind to have low monthly outgoings than a fancy holiday or car.

6. Make sure you have cash to cover the refinancing costs.

You will have the same fees and expenses you did when you first purchased your home, including a home appraisal, closing costs, and other fees and points. Further, while you may be able to remortgage with no points or closing costs, your interest rate could be higher. And there is no reason to remortgage if you are going to end up with a higher interest rate!

7. Talk to lenders.

You should talk to several lenders to see what the current interest rates are and how much money you will need. Then figure out what your new payment would be if you remortgaged and how long it would take to recover the costs.

8. Adjust your mortgage term.

When you remortgage, you can take the opportunity to change your mortgage term. Maybe you originally took out a 15-year mortgage, but want to remortgage to a longer loan term so you can have more cash each month. Or (much better) maybe you want to reduce your mortgage term from 30 years to 15 or even 10, and get your mortgage paid off more quickly. Wouldn't that be nice?