Refinancing Your Mortgage
What is a refinance?
A mortgage refinance is when you pay off your current mortgage, while replacing it with a new one. Essentially, when you refinance your current mortgage you are negotiating another, usually with more favourable terms. The new mortgage may have a different balance, interest rates, repayment periods, and payment amounts. If you desire to make alterations to your current agreement, then a refinance is a great option. The refinance process will be very similar to applying for your current mortgage, meaning that you’ll have to provide the same documentation and pass the stress test again. For more information on the stress test, visit my blog here.
Signs refinancing should be on your radar:
1. You’re looking to borrow more money
In the case of a refinance, you can borrow up to 80% of your homes appraised value. For example: if your current mortgage balance is $500,000, and the appraised value of your house is $800,000. You will be able to borrow up to $640,000. That means that you technically borrow an additional $140,000. Borrowing more money can lead to several positives, including doing large home renovations, paying off large debts, investing in your business, or even something fun like planning a big trip. The main goal of a refinance is to always to put yourself in a better financial position than you were before. If you don’t need to borrow a large amount of money, there is an alternative option that might be better suited for you – Home Equity Line of Credit (HELOC). Although a HELOC has higher interest rates than a refinance, you are only required to pay interest on the actual amount borrowed.
2. You want to change your interest rate
Interest rates can increase or decrease depending on the state of the economy. If you are locked into a fixed rate mortgage and rates decrease, you likely want to take advantage of that rate drop. On the other hand, if you’re on a variable rate mortgage and the rates increase like they did in 2022, then you may want to refinance your mortgage and change to a fixed rate mortgage so you know exactly what your monthly payments will be. To keep things honest, there is also a risk that interest rates may increase at the time you’re looking for a refinance so you may not see this benefit.
3. You want to change your mortgage details
This can range from increasing your amortization so you can start making lower monthly payments to including prepayment clauses so when you are ready to pay off your mortgage you have more flexibility, or even change from a variable to a fixed rate. It’s important to go into your mortgage knowing exactly what details are important to you and your future needs, so that you can set yourself up for success right from the beginning. Thankfully, if your needs change, refinancing is an option!
Benefits of refinancing:
Lower your interest rate, which can result in significant savings over the life of your mortgage.
Lower your monthly mortgage payments by lowering your interest rate or extending the repayment period, making it more manageable and improving your cash flow.
Access the equity in your home and use it for something that’s important to you, whether that be home renovations, travel, investing in your business or even sending your children to school!
You can consolidate your debts that have high interest rates, e.g., credit cards., or loans. If you reduce those higher interest debts, you’ll free up your overall monthly debt payments and you'll save money in the future.
If you have a first and second mortgage taken out on your home, you can refinance to consolidate these two mortgages so that your monthly payments are much easier to manage.
You don’t have to stick with your current mortgage lender when you want to refinance, you have flexibility. It is advised to shop around and see what different products, rates and options are out there – speaking to a mortgage agent will be a huge benefit during the process.
Cost of refinancing:
Just like your current mortgage, there will be costs associated with refinancing outside of your monthly payment.
Costs may include:
Refinancing involves certain closing costs, including appraisal fees, legal fees, and other closing costs. These expenses can eat into your potential savings, so it's important to consider whether the benefits outweigh the associated costs.
If your existing mortgage has a fixed interest rate or specific terms, refinancing before the term ends may result in prepayment penalties. These penalties can offset the savings you expect to achieve through refinancing.
When you refinance, you typically start a new mortgage term, which means extending the time it will take to fully repay your mortgage. While this can result in lower monthly payments, it may also mean paying more in interest over the long term.
Applying for a refinance requires a credit check, which can temporarily lower your credit score. However, if you make timely payments on your new mortgage, your credit score can recover and improve over time.
Accessing the equity in your home through refinancing can be beneficial, but it also carries the risk of overborrowing. It's important to use the funds wisely and avoid taking on excessive debt that could strain your financial situation.
Although refinancing does come with a cost, and potentially some penalties, if you can validate that the savings will outweigh the upfront costs, then it is well worth it as you can save thousands of dollars. It's crucial to carefully weigh these pros and cons, considering your financial goals, current circumstances, and long-term plans before deciding to refinance your mortgage. Consulting with a mortgage expert can help you determine this.
What is the difference between a refinance and a renewal?
A renewal is what happens at the end of your mortgage term, which is most commonly 5 years. When you renew your mortgage you are staying with the same lender for another term, meaning you won’t have to reapply. The terms and conditions of your current mortgage will typically stay the same, with potential for the rates to change.
If you want more information on refinances, and if it's right for you, book a meeting with me!
