Refinancing your home can be an effective way to reduce your interest payments, consolidate your debt, or even to finance a large purchase or project. But before you refinance your home, you need to understand exactly what this strategy does and does not do. So if refinancing is something that you are considering, here are a few things that you need to know.
Understand what it means to refinance.
While it may sound like a fancy financial term, refinancing is really nothing more than breaking your mortgage in order to replace it with another one. The mortgage that you replace the original mortgage with could be for the same amount of money or it could be for a higher amount of money. The original mortgage is paid off with the new mortgage and – if you chose a mortgage for a higher amount of money – any additional cash goes to you which you can then use to pay off creditors or put toward something else.
Refinancing is an opportunity to borrow from your home equity.
If your new mortgage is for a higher amount than the original, it means that you are borrowing from your home equity. When you refinance, lenders will usually let you borrow up to 80% of your home equity – so this can be a good opportunity to get a loan at a low interest rate.
To illustrate, let’s say that your home is valued at $500,000 and you have $300,000 still owing on your mortgage. That means you’ve got $200,000 in home equity. If you borrowed the full 80%, you could get $160,000. So your new mortgage when you refinance would be for $460,000 – or the $300,000 you need to pay off the original mortgage plus the $160,000 that you are borrowing from your home equity,
You will have to pay a financial penalty for breaking your mortgage.
One thing to keep in mind when you refinance is that because you’ll be breaking the terms of your original mortgage, there will be a financial penalty to pay. Generally speaking, the closer you are to your mortgage renewal date, the less you will have to pay for this penalty. (So if you recently renewed your mortgage, the cost of refinancing may be prohibitive.)
Despite the fact that there will be a financial penalty to pay for breaking your mortgage, it may still be a good deal if the amount of money you’ll save in interest payments will be greater than the financial penalty that you’ll have to pay. This can be complicated to figure out on your own, but your mortgage broker has software to run the calculations. Your broker can tell you whether you’ll save money by refinancing your mortgage, and if so how much.
You can save money on interest by refinancing your mortgage.
Perhaps the number one reason why so many people choose to refinance their mortgages is because they can save money on interest by doing so. If interest rates have gone down since you got your current mortgage or if you now qualify for a better rate because you have improved your credit, refinancing can be a smart financial strategy. Remember, even a small difference in percentage can save you thousands of dollars over your amortization period.
Another way that you can save money on interest is if you are consolidating higher interest debt. Some types of loans like credit cards and payday loans can have extremely high interest rates. The interest rates on mortgages however have been very low for several years. By consolidating your debt with a mortgage refinance, it means that with each payment you’ll be able to pay more on the principal – so not only will you save money on interest, but you’ll be able to pay off your debt considerably faster.
And the final way that you might be able to save money with a mortgage refinance is if you believe that mortgage rates are likely to go up. The Bank of Canada has been hinting for some time now that they will be raising interest rates. If you are concerned that rates will go up before your mortgage renewal date, you may want to consider refinancing your mortgage.
You may need to get your home appraised.
If you intend on borrowing from your home equity when you refinance your mortgage, the lender may require you to get a home appraisal in order to ensure that your home’s value is high enough to warrant the loan that you are requested.
A home appraisal is typically done at the homeowner’s expense (usually a few hundred dollars), but it is sometimes a necessary part of the process. If an appraisal is required, your mortgage broker can help you arrange this.
Work with a mortgage broker to get the best deal on a mortgage refinance.
While the goal of refinancing your mortgage is usually to get a better interest rate, there will still be some lenders that will offer better rates than others. But shopping various lenders on your own can be complicated and time consuming.
Your best strategy for getting the lowest interest rate on your mortgage refinance is to work with a mortgage broker. Brokers have an extensive network of lenders that they work with and are best equipped for find you the lowest possible interest rate for your refinance.
Don’t take out any other big loans before your mortgage refinance is finalized.
One thing to keep in mind when you refinance your mortgage is that you will get a better deal from the lender if you have good credit. Taking out another big loan during the application process (like a car loan, etc.) can temporarily lower your credit score and affect what you (and even if you) qualify for.
Be sure to wait until your mortgage refinance is settled before you make any big financial moves.
Contact us today
There are many advantages to getting a mortgage refinance but there are also some things you need to know and that a mortgage broker can help you with. If you are considering refinancing your home, call us today to speak with one of our brokers.
