There are benefits and drawbacks to refinancing your mortgage, so it is important to be knowledgeable of the steps involved.
Why refinance your mortgage?
1. Lower interest rates
One of the best reasons to refinance is to lower the existing interest rate on your mortgage loan. Many lenders say that even 1% savings is enough incentive to refinance. Lowering your interest rate can help you to build equity and will decrease the amount of your monthly payments. You will have fees and penalties for breaking your existing mortgage but in the long term, the amount you save may outweigh the initial costs. It is important to consider how long you plan to remain in your current home and research whether a fixed-rate mortgage or a variable-rate mortgage makes more sense for your current situation.
2. Locking in an Interest Rate
Mortgage rates are constantly fluctuating and getting a mortgage rate lock is a way to keep your home loans interest rate from moving higher. If you are anticipating higher future rates, you may want to consider refinancing in order to lock down a longer-term rate. In this case you are protected from higher rates, but you won’t get a lower rate either. Rate lock policies vary by lender so you may have to consult your advisor to find out about available rate lock periods and whether or not there is a fee.
3. Debt
If you have multiple loans with various payments and interest rates you may find yourself struggling to keep up. Refinancing allows you to combine your big payments into one long-term loan including auto loans, credit card debts and other lines of credit. This may lower your monthly payments as well as help you to pay off your debt quicker as one monthly payment is easier to pay off than multiple payments to different lenders.
4. Home Equity
If you have any sort of unforeseen costs, you are able to pull equity from your home by refinancing through a new mortgage or a Home Equity Line of Credit (HELOC). You can calculate your equity by subtracting the amount you have left to pay off your mortgage from the total market price of your home. This can help to put some extra cash into your pocket for renovations, education for your children etc.
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The process of refinancing your mortgage
1. Evaluate the market
The first step is to evaluate your mortgage as it relates to the market rates in your area. Refinancing is only beneficial under the right circumstances, so you need to make sure that the timing is right. Say you are 2 years into a 5-year fixed-term mortgage and interest rates have declined since you first got your mortgage. New buyers will pay a lower rate for the same term that you did. In this circumstance, refinancing would be beneficial to you.
2. Research
There are many different types of mortgages in Canada, and each person has a different financial circumstance so doing your research is key to figure out which type of mortgage suits your situation the best. There is a fixed-rate mortgage which your interest rate and monthly payments are consistent throughout your term, variable rate which is when your payments fluctuate depending on the market and a combination rate mortgage which includes both fixed and adjustable interest rates. Refer to this article for different types of mortgages. Credit ratings can also make or break your loan application. If you have a low credit score it is best to repair it before applying because banks will often turn away loan applications of people who are in debt, out of a job or have filed for bankruptcy.
3. Determine your monthly payments
The amount you borrow depends on the equity of your home. The Financial Consumer Agency of Canada defines home equity as the difference when the remaining balance of your present mortgage is subtracted from the appraised value of your property. As you continue to pay your mortgage, your home equity increases, and the same thing happens when the value of your home increases.
4. Prepare documents/Calculate total cost
There is certain relevant documentation that you will need to get in order before submitting your application. You can ask for a list of documents you will need to submit which usually includes pay stubs and tax documents. There are also other costs to be considered such as home appraisal costs, title search fees, title insurance fees and legal costs. Adding these costs into your calculation will give you a clearer picture of whether or not refinancing is the best option for you.
5. Submit application
When you have figured out which mortgage is best for you and all documentation and costs have been sorted it is time to submit your application. Working with a professional is beneficial throughout the process because they will assist in covering all the bases and may represent you by submitting your loan application for evaluation.
6. Get approved and review the agreement
After you have been approved it is important to look over the terms of the agreement to make sure you agree to the lender’s conditions. Working with a mortgage professional for this step would be beneficial because they could negotiate lower interest rates or better terms if you want to make changes to the initial loan agreement. Pay particular attention to upfront fees because some lenders may not include these in the closing costs but that does not mean you won’t be charged down the road.
