How to Refinance a Second Home Mortgage
Follow-up financing: pay off the remaining debt correctly
A real estate loan is rarely paid off after the fixed interest rate has ended. What remains is usually a residual debt, the follow-up financing of which, also known as a prolongation, has to be renegotiated with the bank. In some cases it is also advisable to change banks in order to benefit from more favorable conditions. What borrowers need to consider with follow-up financing.
Real estate loans are paid off over a long period of time. The fixed interest rate often ends after ten or 15 years - at this point, however, a large part of the real estate loan has usually not yet been paid off. How much this part is depends on the term and the amount of the originally agreed repayment. An example: Ten years ago a loan for 100,000 euros was taken out with 4.5 percent interest and two percent repayment. After the ten-year fixed interest rate has expired, the remaining debt in this case is around 75,000 euros. The borrower must renegotiate this amount with a bank for follow-up financing.
Follow-up financing: changing banks can be worthwhile
After the fixed interest rate has expired, a borrower has several options for his follow-up financing - he can take out a new loan with his own bank - this is also called a prolongation. Or he looks around for a new loan at another bank.
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With such a rescheduling, however, the borrower incurs exchange costs - the assignment of the land charge to a new bank usually costs up to 0.3 percent of the loan amount. However, such a change can still be worthwhile due to lower interest rates. The situation is different if the bank does not agree to an assignment of the land charge. Then the borrower is forced to first delete them and then have them re-entered. This in turn is associated with significantly higher costs of around one to one and a half percent - depending on the amount of the loan.
Delete and register the land charge: This is what property owners and buyers need to know about the land charge.
However, if the new bank offers a lower interest rate for follow-up financing than the house bank, it can still be worthwhile.
When is it worth switching banks for follow-up financing?
An example: The house bank offers a ten-year loan of 100,000 euros two percent Interest at two percent Repayment and one Monthly installment of 333 euros at. The remaining debt after ten years is 77,880 euros.
The alternative offer from another bank reads on 1.5 percent interest and 2.5 percent initial repayment. With a monthly installment of 333 euros, the remaining debt is only 73,050 euros. That makes one Savings of 4,830 euros initially.
Indeed: This amount is reduced by around 300 euros for the assignment of the land charge (Savings: around 4,530 euros), if a new land charge is necessary, the costs amount to around 1,070 euros - In this case, the savings are reduced to around 3,760 euros.
Regardless of which option a borrower chooses: Borrowers should check whether it is worthwhile to terminate the current loan before the fixed interest rate expires. This is always possible with a period of six months if the loan has been running for at least ten years and is particularly worthwhile in times of low interest rates. Even then, the borrower can either negotiate follow-up financing with his house bank or look for an alternative at another credit institution.
Prolongation: cancel the loan after ten years and save
Anyone who has taken out a 15-year fixed interest loan for EUR 100,000 with 4.5 percent interest and two percent repayment in the past pays a monthly rate of around EUR 542. He can terminate the loan after ten years with a notice period of six months: The remaining debt at this point in time is around 72,700 euros, for which the property owner has to take out follow-up financing. If he does not quit, his remaining debt amounts to after 15 years on 57,300 euros.
With follow-up financing after ten years and six months, with the same rate, 1.5 percent interest and a correspondingly higher repayment after a further four years and six months, the remaining debt is only around around 47,000 euros.
Compared to the option of simply letting the 15-year original loan continue to run, the homeowner saves until then over 10,000 euros.
Interest rate security with forward loans
Another option for follow-up financing is the forward loan, also known as a reserve loan. The conditions for a future loan are already agreed today. If the fixed interest rate ends in two, three or five years, for example, the borrower can agree on a fixed interest rate for the follow-up financing that is due later. However: banks usually charge an interest surcharge for such an interest rate reservation.
This means that forward loans are particularly interesting for those who financed a property a few years ago at what is now a high interest rate. If you anticipate that interest rates could rise in the future, you can use a forward loan to secure yourself a few years in advance with a relatively low interest rate.
Interest surcharge for the forward loan
The interest surcharge for a forward loan is usually 0.01 to 0.03 percent per month between the conclusion of the contract and the use of the reserve loan. At a market interest rate of, for example 1.5 percent this means:
- With one year in advance and an interest surcharge of 0.01 percent, the interest increases to 1.62 percent.
- With one year in advance and an interest surcharge of 0.03 percent, the interest increases to 1.86 percent.
- With three years in advance and an interest surcharge of 0.03 percent, the interest increases to 2.58 percent.
Prolongation: It is essential to compare offers
Regardless of which option a borrower chooses: In order to shorten the entire term of a loan, it is advisable to agree a higher repayment rate when extending. The catch: the higher the repayment, the higher the monthly loan installment. Alternatively, it is advisable to continue to repay little, but to negotiate with the bank about special repayment options. That means: If the property owner has enough money left over, he has the option at certain time intervals to pay off part of his debts out of turn, so to speak.
It is precisely because of such options that property owners who are considering follow-up financing should compare as many offers as possible and calculate what the loan will ultimately cost them. Which follow-up financing is best for which borrower depends on many factors - it depends on the amount of the remaining debt, the current and future interest rate, and what the borrower can afford. If in doubt, an independent financial advisor will help.
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