Mortgage refinancing is simply an accepted way of replacing an existing mortgage with a new one.
For this reason, mortgages that are being refinanced are likely to offer advantages such as lower interest, tapping into the home’s equity, and changes in loan terms and conditions.
In contrast, refinancing is costly to homeowners and is associated with some costs and considerations.
As such, any Canadian homeowner should be made to learn more about refinancing, including exactly how it applies to them.
This comprehensive guide will explore what mortgage refinancing is, the reasons to consider it, the steps involved, and the associated costs and benefits.
By the end, you’ll have a solid foundation to decide whether refinancing your mortgage is the right move for you.
What is Mortgage Refinancing?
Mortgage refinancing is the concept of replacing an existing mortgage with a new mortgage. In general, refinancing has different terms such as interest rate, lower or higher compared to the previous one, or an extended or shorter period of repayment.
Ideally, refinancing simply tweaks the situation into something more advantageous in terms of finances by making monthly payments lower, changing the composition of the loan, or making home equity available for other purposes.
Mortgage Refinancing Definition
In simple words, mortgage refinancing is a new loan that pays off your present mortgage. The new loan will have its own interest rate and terms and conditions that might be more favorable depending on the economic condition or your situation. Refinancing allows you to pay more manageable payments, lower interest cost, or other benefits.
Reasons for Refinancing your mortgage refinance
Different reasons push homeowners in Canada into refinancing:
1. Lower Interest Rates Homeowners mostly refinance to take a home equity loan take advantage of a lower interest rate which consequently reduces the monthly repayment plus total interest paid in the lifetime of the loan.
2. Change Loan Terms you can adjust your mortgage term through refinancing either extending it to pay smaller monthly portions or shortening it and thus paying off the remaining mortgage balance faster.
3. Tapping Home Equity Homeowners can draw on the wealth represented by their own home equity-the difference between market value and the balance remaining on the mortgage-to pay for home improvements, pay off other debt, and finance big-ticket expenses.
Reasons to Refinance Your Mortgage
Now that you have given a thought to refinancing, here are the most important reasons to refinance your mortgage in Canada. These reasons ensure better financial benefits:
Lower Interest Rates
The primary reason that a homeowner turns towards refinancing in order to lock in a lower interest rate. If the markets cut the interest rates below the interest rate on your current monthly mortgage payment then gigantic savings can be achieved through refinancing. With this move, you can reduce your monthly mortgage payments, making the loan cheaper. Of importance is the fact that with lower interest rates, the total amount you will pay in interest across the length of the loan reduces so much that it can actually save you thousands of dollars.
Changing Loan Term
A modification in a mortgage term changes finance either positively or negatively.
Pay off the loan quicker: Refinance to a shorter period. Instead of keeping it as it is, keep it 25 years, refinance and pay off the loan within the cash out refinance to a shorter period. This might make the payments go up each month; however, it makes good sense to pay off to save the interest over time.
Improve the Loan Term: Conversely, stretching your loan term can decrease your monthly payment and provide more space in your budget. The drawback, of course, is that you will pay more interest during the life of the loan.
Home Equity
Also, refinancing will give you a possibility of accessing home equity. That will come in handy in paying for big-ticket items like repairs or renovations of your house, college tuition, or other high-cost debt burdens. You can also borrow against what you have built up in your home equity line and avoid some of that cost through lower interest rates by refinancing.
Switching from fixed rate to variable rate mortgages
Another refinance reason is to change from a fixed-rate mortgage to a variable-rate mortgage, or vice versa.
Fixed-Rate Mortgage: This mortgage has an exact interest rate for the term with resultant steadiness and predictability in your payments.
Variable-rate Mortgage: The interest rate of a variable-rate mortgage will fluctuate with the market, sometimes offering lower rates when the market is loose but with the risk of greater increases when rates steepen.
You can take the which loan’s interest rate structure, best fits your current financial goals and risk appetite at the time of refinancing.
Debt Consolidation
If you have high-interest loans, such as credit cards or personal loans, you can even refinance those into your mortgage. That’s when you roll all those debts into one loan with a lower interest rate that may simplify your finances as well as save you money in interest over the long run.
How to Refinance Your Mortgage
Refinancing a mortgage is a step-by-step procedure that requires careful planning and decision-making. Here’s how you can successfully refinance your mortgage:
Review Your Current Mortgage
Before making any decisions, it is first important to review the terms of your current mortgage. Note down your interest rate, monthly payments, remaining balance, and any penalties for breaking the mortgage early. Knowing where you stand helps you know if refinancing is right for your current financial situation.
Define Your Goals
Determine why you are refinancing. Do you want to lower your monthly payments? Tap your home equity? Switch the loan term? Knowing your goals will make it easy to choose the best refinancing option for you.
Monitor Your Credit Score
Your credit score can significantly affect the terms, and rate of interest you’ll be offered when you refinance. A higher credit score often equals better terms. Be sure to review your credit score ahead of time and identify negative factors to work on before making a loan application.
Shop for a Lender
Since the interest rates and terms of various lenders differ, look for several offers. Compare offers based on competitive interest rates, a low cost in fees, and flexible terms according to your goals. Online mortgage calculators or a mortgage broker can help you compare and select a great offer.
Refinance Application
Once you have narrowed it down to a lender, it becomes time to apply for refinancing. Applying to refinance usually involves some paper work: verifying income, bank statements, and sometimes present mortgage information. The mortgage lender, will then study the application and decide whether to approve or decline your loan.
Determining the Expenses
To make a final decision, make sure you know how much it costs to refinance. Some of these costs include:
- Closing Costs: Fees incurred in processing the loan, and this line of credit can even include an origination fee and administrative fees.
- Appraisal Fees: The cost of appraising your house to determine its current market value.
- Prepayment Penalties: If your current first mortgage loan you are servicing has prepayment penalties, add this to the refinancing cost.
Costs and Considerations
Refinance your mortgage-which may bring you cost-saving measures, yet also must know the expense incurred. The first cost includes:
Prepayment Penalties
Others charge prepayment penalties when you pay your mortgage balance on it off too early. The amount of these penalties range from a couple of months’ worth of interest to a percentage of the remaining balance in your mortgage. So, be sure to determine whether your current mortgage carries prepayment penalties or not and factor this into your decision to refinance or not.
Appraisal Fees
Most refinancers require an appraisal, whereby your home is evaluated to assess its current market value. Appraisal fees typically range between $300 and $500, depending on the size and location of the property.
Legal Fees
Refinancing also requires legal services to ensure that your new mortgage is duly registered as well as correcting all the paperwork in place. Legal fees differ in amounts but typically fall within a range of $500 to $1,000.
Other Costs
Other costs you could incur may be those of handling fees, processing fees and title insurance. Aim to get a breakdown of these costs from your lender, which you can then assess for the cost of refinancing.
Pros and Cons of Refinancing your mortgage refinance process
Refinancing has many advantages, but there are also liabilities. Here’s a glimpse at the benefits and drawbacks:
Benefits
Lower Rate: Refinance to a lower rate to lower your monthly payment amount and save on interest.
Home Equity Access: Through refinancing, you can tap into your home equity for a major expense. This may be for remodeling the house or paying off other debts.
Change Loan Terms: Refinance so that you can change the term of your mortgage to meet your needs, pay off your loan faster, or decrease monthly payments.
Downsides
Fees Charged Upfront: Refinancing always incurs fees. Some of these fees include an appraisal, legal fees, and sometimes, prepayment penalties.
Paying Over a Longer Period: You pay more in interest over time, although your monthly payments may be lower.
Credit Score Changes: A hard inquiry is put on your credit report when you apply for refinancing. Your credit score will temporarily drop by this action.
When to Consider Refinancing your mortgage refinance
Timing is everything in refinancing. Here are the best scenarios where refinancing your loan makes sense:
Interest Rate Environment
Well, if current interest rates happen to be considerably lower than your prevailing mortgage rate, then refinancing would save you a ton of money.
Financial Changes
If you have bettered your financial situation – income increases, credit scores go higher – refinancing helps you get the finer loan terms, too.
Life Events
Even big life events – perhaps a new home, retirement, or a pricey accommodation-cost you enough to change the terms of your first mortgage payment and tap into your home’s equity.
Conclusion
For most homeowners in Canada, this tool in the financial corridor can be quite powerful, refinance of the mortgage. And it should provide you with benefits like the reduction in interest rates, adjustment of loan terms, and unlock the power of home equity.
It is also wise though to weigh that cost in the long run before you can make the final decision. All of this can be determined by analyzing your present and mortgage rates, identifying your goals, and shopping around for the best rates to allow you to see if