When you choose to refinance your mortgage, you replace the existing mortgage you have in place with a new one with different terms. There are many reasons a person may choose to refinance their mortgage. Perhaps interest rates have dropped since you signed your mortgage. Or maybe you want to tap into your home equity. But is now the right time for you to refinance your mortgage? While there are many benefits to refinancing your mortgage, there are downfalls if you decide to do it at the wrong time. This article will help you decide if now is the right time for you to refinance your mortgage.
How to refinance your mortgage
Before you can even begin to think about refinancing your mortgage, you will first need to find out if you qualify. Your lender will calculate your loan-to-value ratio by dividing how much you owe on your mortgage along with other debts secured by your property into the current value of your home. If your loan-to-value ratio is lower than 80%, you can refinance your mortgage.
Your mortgage lender will also review your monthly income and your debt payments. They may also ask for the following documents:
- A copy of your T4 slip
- Notice of Assessment
- A recent paystub
- Your mortgage statements
- A recent property tax bill
- A recent asset statement for your investments, RRSPs, and savings accounts.
What are the benefits of refinancing your mortgage?
Getting a lower interest rate
If mortgage rates have dropped since you received your mortgage loan, you should consider refinancing your mortgage. You can take advantage of reduced interest rates depending on the type of mortgage you have. Lower interest rates mean lower monthly payments and paying less interest on the mortgage loan long-term. Even the slightest reduction in mortgage interest rates could save you thousands of dollars in the long run.
Consolidating your debt
Because mortgage interest rates are usually low, refinancing is a great way to free up cash so you can pay off any high-interest debt. When you exchange your existing mortgage for a larger loan and take the difference in cash, it’s called a cash-out refinance. You can use this cash to help pay off your debts. However, again, your loan-to-value ratio needs to be under 80% to qualify for a cash-out refinance.
Changing your mortgage terms or get a different mortgage
Sometimes things happen in life where your financial needs change and you need to change the terms of your mortgage to meet these needs. You may need to switch the type of mortgage you have or pay off your mortgage faster, in which case you can choose to refinance your mortgage. Let’s say you received an inheritance and want to use some of that money towards your mortgage. Refinancing into a term with more prepayment privileges, such as an open mortgage, allows you to make lump-sum payments. Or let’s say you have a variable-rate mortgage and mortgage rates have dropped; you can refinance to a fixed-rate mortgage to lock in with lower rates for a longer period of time.
Accessing your home equity
When you make payments towards your mortgage, you are building equity in your home. Your equity is the difference between your property’s market value and the outstanding balance of your mortgage. Along with any other debts secured by your property. If you need money, you can refinance your mortgage to access up to 80% of your home’s appraised value in cash.
How to use your home equity
When using your home equity, you typically want to use that money towards something important. Using your home equity to pay for a luxury vacation? Probably not the best way to spend your money.
These are a few good reasons why you may choose to tap into your home equity:
Paying for a major home renovation
Replacing a roof, renovating a bathroom, fixing faulty wiring are expensive costs. If you need financial help affording these repairs and renovation projects, you can use your home equity to help cover the costs. You’ll get the upfront benefit of the finished project and can pay the bill over time. Not to mention the added value in your home by doing renovations and upgrades.
Paying off major expenses.
Was there an emergency you need to pay for? Are you sending your kid off to college and you’re worried about affording that tuition bill? To cope with life’s expenses, you can access funds without taking out another loan from the bank by tapping into your home equity.
What risks are involved with refinancing your mortgage?
Before you decide to refinance your mortgage, you should be aware of all the costs involved with refinancing. You likely will need to pay for an appraisal, legal fees, and possible prepayment charges. If you decide to switch lenders, there may also be a discharge fee. It’s also important to understand the risks of refinancing. For example, if you are switching from a fixed-rate mortgage to a variable-rate mortgage, you will need to deal with the risk of rising interest rates and higher monthly payments in the future if that variable rate suddenly skyrockets. This is why it is even more important to consult a professional, experienced mortgage broker ahead of signing off on any mortgage.
Want to find out if now is the right time for you to refinance your mortgage? Call me, Darren Robinson, today. Don’t just think of me as your mortgage broker, think of me as your financial partner as well. With my assistance, I can help you decide if now is the right time for you to refinance your mortgage. Knowing the short-term and the long-term benefits and downfalls specific to your mortgage and your financial situation is key to making smart financial decisions. To get started, book a virtual consultation with me here, or give me a call at 705-315-0516.