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Mortgage Refinancing — A Complete Guide Without The Mystery

Mortgage Refinancing — A Complete Guide Without The Mystery

referring to a mortgage refinancing guide

Ever wondered about the ins and outs of mortgage refinancing? Simply put, it’s like hitting the reset button on your home loan. You break free from your current mortgage, settle the bill, and jump into a new loan with its own terms and a fresh interest rate.

Timing and careful consideration are key to making this financial move work in your favour. Before deciding if a mortgage refinance is the right path for you, it’s essential to understand the basics. I’ll break down the process, helping you understand why, when, and how it pays off—literally. Together we’ll unravel the mystery of mortgage refinancing and equip you with the knowledge you need to make informed decisions about your home and finances.

How Does Refinancing Your Mortgage Work?

When you refinance, you’re basically adding a new mortgage to your home so the process is similar to applying for the first time. 

To start the process, you’ll need a home appraisal to determine your property’s current value. Just like the first time you applied for a mortgage, your income, debt service ratios, and credit history will be assessed. This means providing the same information, such as identification, proof of employment and income, details about your assets, savings, debts, and tax documents.

Additionally, be prepared to undergo another mortgage stress test to ensure you can handle repaying your refinanced mortgage, especially if interest rates go up. The minimum qualifying rate for this stress test will be either 5.25% or the rate offered by your lender plus 2%, whichever is higher.

When you’re considering refinancing, take the time to compare different lenders. It’s not mandatory to stick with your current one. In fact, this is the ideal time to work with a mortgage broker who can explore various options to ensure you secure the best rate, terms, service, and conditions for your new mortgage. You can also negotiate with your current lender for a better mortgage contract if you decide to stay with them during the refinancing process.

Why Would You Refinance Your Mortgage?

When it comes to refinancing a mortgage, there are two main reasons for you to consider it:

To Reduce The Cost Of Borrowing:

  • Refinancing helps reduce your mortgage expenses by getting a better interest rate, extending your repayment period, or negotiating improved terms. You can save money both in the short and long term without necessarily using your home equity.

To Get Cash For Large Expenses Or To Pay Off Debt:

  • If you have some large expenses you’ll need money for, refinancing allows you to access extra money left after paying off your old mortgage. This cash, ranging from tens to hundreds of thousands of dollars, can be used for things that either grow in value or provide value, like home improvements, investments, education, starting a business, or consolidating debt.

  • While you can use this cash for anything you want, like a vacation or a new boat, it’s a good idea to explore other, potentially cheaper ways to pay for these items before deciding on a mortgage refinance. The key is to make smart financial choices aligned with your goals.

How Much Money Can You Get From Your Refinance?

When you refinance your mortgage, you might have some extra money to use. The amount you can borrow depends on how much your home is worth. Usually, you can borrow up to 80% of its value.

For example, if your home is worth $500,000, you could borrow up to $400,000 when refinancing. But, if you still owe $350,000 on your current mortgage, you’ll only have $50,000 left after paying it off ($400,000 – $350,000). This leftover money is yours to spend any way you want.

Is There A Cost To Refinance Your Mortgage?

The simple answer is yes. Before you decide to refinance your mortgage, make sure to plan for added expenses. These would include legal fees, a title search and title insurance, home appraisal costs, and mortgage discharge fees if you change lenders.

Also, you may have to pay a prepayment penalty. All these costs can add up to thousands of dollars in upfront charges, not to mention the interest you’ll need to pay. Understanding the total cost of a refinance is necessary for making a fair comparison with other financing options, such as a home equity line of credit (HELOC) or a home equity loan.

When Is The Right Time To Refinance Your Mortgage?

If you’re facing a prepayment charge, the best time to refinance is usually near the end of your mortgage term, especially if you have a closed, fixed-rate mortgage. This penalty is called the interest rate differential (also known as the IRD). Each lender calculates it differently, but it usually results in higher penalties than you would face with an open or variable-rate mortgage. For these mortgages, the penalty is usually three months of interest.

Deciding whether to refinance mid-term comes down to whether the benefits are worth the costs. Ask yourself if you can secure a better mortgage rate, if the costs to refinance outweigh the benefits, and if the way you’re using the additional cash is worthwhile. For example, paying off high-level, high-interest debt will probably outweigh the penalties and fees for refinancing.

Is Refinancing Your Mortgage The Right Idea?

Refinancing your mortgage is a common way for many Canadians to make use of their home equity. When your research is done carefully, and you feel it’s the best decision, it can help ease your debt or boost your overall wealth.

If you have a variable-rate mortgage and interest rates have gone up during your term, refinancing could be a long-term benefit. Or, it might let you switch to a fixed-rate mortgage with a lower, more steady rate, all without incurring penalties while also benefiting from locking into a steady mortgage rate, so you can stick to a budget more easily.

However, there are situations where refinancing may not be the best choice. For example, if prepayment penalties eat up a big chunk of the money you get, it might be wiser to wait until the end of your term and explore better options when renewing your mortgage.

If I want you to be cautious about anything in terms of refinancing it’s extending your amortization period through refinancing. While it can lower your monthly payments, it also means paying interest for several more years, ultimately increasing the overall cost of your mortgage. 

Which Is Why You Should Review This List Of Pros & Cons Before You Decide To Refinance Your Mortgage

Of course, refinancing your mortgage is a personal decision and only you will know if it’s the ideal time for you to move forward. Making sure you understand the up and downsides will prevent unhappy surprises in the process and I like to ensure my clients are fully aware of both sides of the coin.

The Pros:

  • You may save money with a lower interest rate. 
  • You can arrange a more manageable monthly budget by making smaller mortgage payments. 
  • You will be able to tap into money that can be used for major purchases or to consolidate high-interest debt.

The Cons:

  • If you lengthen your amortization period, you’ll wind up with a longer mortgage which means you’ll pay more interest.
  • You will have to pay penalties and other fees associated with a new mortgage.
  • You may end up paying a higher interest rate than if you waited for your renewal date.
  • A mortgage refinance can negatively impact your credit

If You’re Not Sure About Mortgage Refinancing, There Are Other Options

Now that you’ve taken the time to learn more about refinancing your mortgage, perhaps it doesn’t seem right for you: But don’t worry, there are other options to consider.

Some lenders will offer a blend-and-extend mortgage that involves combining your current mortgage rate with a new one, while also extending the term. This keeps your existing mortgage intact without prepayment fees, though there might be administrative fees. The result is a better interest rate, leading to potential savings.

If you have 20% equity in your home, you can borrow against it with a HELOC (Home Equity Line of Credit). You can have this alongside your current mortgage without breaking it, but remember, HELOC interest rates are usually higher than refinancing.

With a Home Equity Loan, you can borrow against your home’s equity. While you avoid prepayment penalties, be aware that interest rates on home equity loans can be higher than refinancing or HELOCs.

Ready To Make A Decision About Refinancing? Call Me!

Deciding to refinance your mortgage is a big decision, but that’s where I come in! As a certified mortgage broker, I’m here to simplify the process. I’ll ensure you understand every aspect before deciding if refinancing is the right step for you. Once we’ve analyzed the numbers and made a decision, I’ll secure the lowest interest rate and most favourable mortgage options tailored to your financial goals for you.

The best part? Working with a mortgage broker is entirely free. To explore your options and schedule a virtual consultation with me, click this link or give me a call directly at 705-315-0516. With more options than traditional banks, I can help you determine the best time to refinance and how much equity you can access in the process.

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