A remortgage has several appealing facets. One which is very popular is using the equity which is freed up to consolidate debt or maybe take the family on a sunny bright holiday. Although the thought of it can lead to euphoria for some, a more practical approach might be the best course of action, especially for the long term. Realize that when you use the freed up equity for other things instead of putting it towards the house, a riskier situation is created. To put it in the frankest of terms, the house has now become collateral for the loan. In other words, if the loan is defaulted on for whatever reason, the lender has the ability to take the home from you. This can turn into a messy situation quickly and one which you will never want to experience. What usually brings homeowners back into a more stable plane of reality is thinking about how long it took to build up that amount of equity. One’s home should be thought of as a huge investment piggy bank. When you put pounds in, eventually those pounds will come back.
A Closer Look at the Pounds
For a more detailed explanation of what is actually happening, let’s throw some numbers out there. If you took an additional 10,000 pounds on a remortgage, it will ultimately have to be paid back. So, you use the equity in your home and take the additional to pay off other debt, buy that cool car you have been eyeing, and take the family on a great holiday. That additional 10,000 pounds is added to your current mortgage balance with a loan product of 4% interest over a term of five years. The additional 10,000 is going to raise the monthly payment by almost 200 pounds. That is much lower than the monthly figure of about 500 pounds you will pay on the 19% personal loan over the course of twenty four months. On paper, looks like a steal doesn’t it?
Two problems immediately jump out. The most obvious is that you are financing your loan balance for a longer term. This means more interest will be paid on the loan. The loan which looked more affordable has just blown up in cost.
Possibly even more important is the fact that you are now using collateral. The ownership of your own home could be in jeopardy if payments were ever impossible to make during the month. Foreclosure could be the only option as you might be unable to work out a revised payment plan or an IVA.
Should I or Shouldn’t I?
The cash which becomes available is usually tempting if you have old debt to pay off, you truly do need a new car, or home improvements are necessary. Because of what is at stake, weigh your options carefully. Make sure the monthly payments will be possible for the entire term of the loan. The last thing anyone needs is a foreclosure hanging over their heads. Financially, you never know what could be heading your way. If everything could be predicted, the answer would be an easy one. Secondly, make sure that the interest you pay on the loan will be worth it for the money you borrow.
Know how much equity you have in your home before speaking to a lender. Sometimes, lenders will try to talk you into a higher loan amount just to make more in interest payments. Be cautious of this and do not be afraid to walk away and deal with another lender.
