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Financial Dictionary - Mortgage refinancing

Mortgage refinancing

When we refinance a mortgage loan, it means we change the conditions of our mortgage and adapt them to ones that suit us better.

There are three ways to do this:

Novation

First, we can renegotiate with our current bank. This case is called novation, and consists of refinancing our mortgage and reaching an agreement with our own bank. This way we can amend any clause, as long as our bank agrees with our proposals. If we choose this option, we may have to pay a fee ranging from 0.1 to 1% of the outstanding capital, depending on whether our financial institution applies this in the conditions we have signed.

Subrogation

Or we can subrogate it, in other words: take out a new mortgage loan with another bank to obtain better conditions. That way, we can change the fees, the level of engagement, the interest rate or the terms. However, we will not be able to increase the capital or change the holders, for example. We will need to have a good level of creditworthiness to be accepted, and a sound financial profile to be able to meet certain costs that will arise because of the change; perhaps a possible commission for subrogation or withdrawal, depending on the conditions of the loan we have taken out.

New mortgage loan

Lastly, we can sign a new mortgage loan, with conditions which are more advantageous to us. Here too we will have to pay fees to cancel one mortgage and open another. This is definitely the most expensive option, because cancelling a mortgage is costly. Before looking at this option, it would be better to try to renegotiate our current mortgage (novate it) or subrogate it to another bank. If we want to take out a new mortgage loan, we will also have to review the conditions of our current loan and its possible penalties. 

Ultimately, we will have to choose the option that best suits our situation, bearing in mind that refinancing always has a cost, given that we will have to formalise each change before a notary and register it in the Property registry. This way we will have to pay notary, agency and registry fees, and, also, if we increase the mortgage or go to another bank, we will have to pay the appraisal of the property. When we do so, we must always calculate our estimated income, so we can make sure we can cope with the new conditions.

What terms will we be able to change when we refinance our mortgage?

We can increase the capital (for example, to borrow extra funds for another project: to refurbish your home, buy a new car...), or pay off other debts from credit cards or other loans; we can extend or reduce the repayment period, either by increasing it or by reducing the instalments; or we can shorten the repayment period, and pay increasingly less. It is a good idea to lengthen it if you want to save money in the short-term or if you are finding it difficult to meet your payments. You have to be careful, though, because ultimately you will pay more money in the end, due to the interest generated; or you can change the interest rate, for example by reducing it, or switching from fixed to variable and vice versa. This could be a good idea if we took out a fixed rate loan originally and we want to update it to the market price; or if we want to pay off our combined debts, placing them under a new loan at a lower interest rate.


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