Life happens. Whether you are facing financial emergency, wanting to improve your financial situation, put more into your investment portfolio, mortgage refinancing can be the answer – when done properly!
What is Mortgage Refinancing?
First, let’s start with what is mortgage refinancing? Refinancing your mortgage refers to the process of renegotiating your current mortgage agreement for a variety of reasons. Essentially, refinancing allows you to pay off your existing mortgage and replace it with a new one.
There are a variety of reasons to consider mortgage refinancing, including but not limited to:
● You want to leverage large increases in property value
● You want to get equity out of the home for upgrades or renovations
● You want to expand your investment portfolio
● You are looking to consolidate your debt
● You have kids headed off to college
● You are going through a divorce
● You want a better interest rate
● You want to convert your mortgage from fixed to variable (or vice-versa)
Benefits of Refinancing
When done properly, mortgage refinancing can result in a host of great benefits to further your financial success. Not only can it help to reduce financial stress and help get you back on track for your financial future, but it can also help you achieve a lower interest rate and allow you to access your home equity! Below are the four top benefits (and reasons) to re-finance:
Access a Lower Interest Rate
As mentioned above, one reason to refinance your mortgage is to get a better rate – this is especially true when done through a mortgage professional. On average, a mortgage professional has access to over 90 lenders! This allows them to find the best mortgage product for your unique needs, versus traditional banks that only have access to their own mortgage offerings. Plus, using a mortgage expert allows you to benefit from their advice at typically zero cost to you.
Consolidating Your Debt
There are many different types of debt from credit cards and lines of credit to school loans and mortgages. But, did you know that most types of consumer debt have much higher interest rates than those you would pay on a mortgage? Refinancing can free up cash to help you pay out these debts. While it may increase your mortgage, your overall payments could be far lower and would be a single payment versus multiple sources. Keep in mind, you need at least 20 percent equity in your home to qualify.
Modifying Your Mortgage
Life is ever-changing and sometimes you need to pay off your mortgage faster or change your mortgage type. Maybe you came into some extra money and want to put it towards your mortgage or maybe you are weary of the market and want to lock in at a fixed-rate for security. Always be sure to talk to your mortgage professional about potential penalties.
Utilizing Your Home Equity
One of the biggest reasons to buy in the first place is to build up equity in your home. Consider your home equity as the difference between your property's market value and the balance of your mortgage. If you need funds, you can refinance your mortgage to access up to 80% of your home's appraised value!
Things to Consider Before Refinancing
As with everything, refinancing comes at a price! If you are experiencing a financial rough-patch or one of the previously mentioned situations and think that refinancing your mortgage could be the right solution, there are a few things to know.
The first and most important thing to understand about mortgage refinancing is that if you opt to refinance during your term, it is considered to be breaking your mortgage agreement. As with any contract, there are associated penalties for breaking them and it could end up being quite costly. If at all possible, it is always best to wait until the end of the mortgage term before any refinancing is conducted.
However, as we have all experienced, there are times when your situation cannot wait. In some cases, refinancing at a lower rate may pay for the penalty costs well within the new term, plus the lower rate will help with monthly savings. However, it is always important to consult your mortgage professional about your particular mortgage agreement.
Potential Mortgage Penalties
To ensure that mortgage refinancing is the right choice for you, it is vital to understand how your lender is going to calculate the penalty if you break a fixed-rate mortgage.
To calculate the penalties, Canada’s big banks will compare the following;
1) The discount you were given off the posted rate at the time that you signed your mortgage agreement
2) The new posted rate for the time remaining in your mortgage at that same discount rate
The difference between these two numbers is the amount of interest the bank will lose for the remainder of the term based on your current balance. This becomes the penalty for breaking your fixed-year term and, in many cases, can be quite hefty.
If you are not with a bank but have a mortgage under a credit union or monoline lender, your penalty would be the interest rate differential above OR a flat three-month interest penalty. Check your mortgage agreement for the specific breakage penalty process.
If you are on a variable-rate mortgage, the typical penalty is three-months interest.
Again, check your mortgage agreement for your specific breakage penalty information.
Other Refinancing Considerations
Beyond the penalties, there are a few additional things to know about mortgage refinancing such as:
● It allows you to tap into 80 percent of the value of your home.
● It requires re-qualification under the current rates and rules, which includes passing the “stress test” again
● No default insurance is required, which could give you more lender options
● There is typically an appraisal cost and legal fees for the new mortgage agreement
So, what can you do? There is an option to sign a fixed rate for a shorter term, such as three years, or you can also consider a variable rate as the penalties for breaking these mortgages are much lower.
You can also consider a mortgage switch, which refers to moving your mortgage dollar-for-dollar to a new lender. This can often help you achieve a better rate, and in this case, the lender covers many of the legal and appraisal fees.