Your Complete Guide to Mortgage Refinancing
When you refinance your mortgage, you’re starting a new one with the same lender or a new one. You might refinance your mortgage to get a lower rate, access equity in your home or consolidate your debts. Breaking your mortgage early will incur a large pre-payment penalty though, so mortgage refinancing is risky. Make sure you do your research.
Reasons you might refinance
Refinancing your mortgage can help you get a lower interest rate and access equity in your home. It can also be used to consolidate your debts.
#1 – Lowering your interest rate:
Refinancing to get a lower interest rate can save you a lot of money. The penalty depends on the type of mortgage you have and whether or not you prepay. If you hold a variable rate mortgage, then expect to pay 3 months’ interest as a penalty; if you hold a fixed rate mortgage, then pay either 3 months’ interest or the IRD penalty. Don’t let penalties deter you – understanding the numbers helps you calculate whether a refinance will save you money.
#2 – Access the equity in your home:
Refinancing your mortgage can give you access to the equity in your home. Refinancing may let you tap into up to 80% of your home’s value, less any outstanding debt. That’s extra money for investment opportunities, home renovations or your children’s education. There are several ways to access this equity, including breaking your mortgage, taking on a home equity line of credit (a HELOC) or blending and extending your mortgage with your current lender.
#3 – Refinancing to consolidate your debts:
If you have enough equity in your home, it may be possible to use this equity to pay off high-interest debt. For example, if you have a number of outstanding debts, such as a car loan, a line of credit or credit card bills, you may be able to consolidate this debt through the variety of mortgage refinance options available.
What are the Pros and Cons to refinancing your mortgage?
A mortgage refinance is a major financial decision that shouldn’t be made lightly. By refinancing, you can save thousands of dollars over the life of your loan. However, there are risks associated with refinancing; for example, if home prices drop in your area and you need to sell, you could lose money on the sale. The table below summarizes the pros and cons of mortgage refinancing.
The potential to get a lower interest rate
Ability to consolidate all your debts into one single payment with a lower interest rate
Ability to access the built up equity in your home
Allows you to swap from a variable mortgage rate to a fixed rate (or vice versa)
Your penalties may be higher than the actual savings
Consolidating many debts into a single one could eliminate the urgency to pay it down
Equity pulls created more debt
Swapping your mortgage rate type may not alway be in your best interest
How do I refinance my current mortgage?
There are several ways to refinance a mortgage, including: breaking your contract early, taking out a home equity line of credit or blending and extending your current mortgage.
#1 – Break your existing mortgage before the term is up
You might want to consider breaking your mortgage early if you’re looking to lower your interest rate or access equity from your home. In this case, you’ll eliminate your existing mortgage and take on a brand new one with any lender.
Breaking a mortgage comes with a pre-payment penalty from your bank, which is normally equal to around three months worth of interest charges. If you can justify the cost of that penalty with your new mortgage rate, then it could still be worth it.
#2 – Acquire a Home Equity Line of Credit (HELOC)
A home equity line of credit is a credit line that provides you with access to the equity in your home. It works a lot like a credit card account, but because it’s a secured loan by the equity you have in your home, interest rates are much lower.
If you do take money from it, you’ll be responsible for monthly interest-only payments on the outstanding balance. You can access a home equity line of credit through your existing lender and a small subset of other lenders.
#3 – Extend and blend your current mortgage
Your existing lender will probably offer you a blended rate if you want to break your mortgage. This is a combination of your current interest rate, plus any additional money you borrow at current market rates. Blended rates are almost always higher than the most competitive mortgage rates on the market, so make sure you compare the blended rate against the savings if you break your mortgage.
What are the costs associated with refinancing my mortgage?
Refinancing your mortgage can be expensive, depending on which strategy you choose. One way to lower your interest rate is by accessing equity in your home. The other way is by switching to a different kind of mortgage altogether. Either way, you will have to pay legal fees—your lawyer must change the wording on the title deed. But if your mortgage balance is more than $200,000, many brokers and/or lenders will cover this cost for you.
If you want to break your mortgage in the middle of your term to access equity or lower your interest rate, you may have to pay a penalty. For fixed mortgage rates this penalty is three months’ interest. For variable mortgage rates, it’s simply three months’ interest.
Learn more about refinancing
If you’re thinking of refinancing your mortgage, reach out today to get the conversation started. My team and I can assess your personal situation at no cost to you and help you understand what your options are. If you’re ready to refinance then I can also find you the best deals and guide you through the process.
How can Ahmad, mortgage specialist at AskAhmad.ca and the Cherity Goerk Hometown Financial Team help you?
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We can offer you some of the most competitive interest rates and mortgage products available because we have access to Canada’s leading lenders, including banks, mortgage firms, trust companies and private lenders.
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