Mortgage Refinancing
Refers you to the process of replacing an existing mortgage with a new one, typically to take advantage of better interest rates or to access equity in the property. By refinancing, homeowners can potentially lower their monthly mortgage payments, reduce the overall interest paid over time, or consolidate debt. It is a financial strategy that allows individuals to adapt their mortgage terms to better suit their current financial situation and goals.
What are the compelling reasons for considering mortgage refinancing as a viable option?
Living in the vicinity of Ontario, Canada, it's likely that your friends have strongly recommended mortgage refinancing to you. It's advisable to heed their counsel, given that the Bank of Canada has significantly reduced interest rates to levels not seen since 2016. Now, you understand the reason behind the enthusiasm surrounding mortgage refinancing.
Mortgage refinancing involves terminating your current mortgage and obtaining a new loan. If you wish to take advantage of lower interest rates, tap into your home equity, or consolidate your debts, refinancing your mortgage is a suitable option.
You might wonder why you should consider refinancing when banks offer the option to defer mortgage payments. However, this is not a flawless solution, as interest continues to accrue during the deferral period.
If you are seeking a comprehensive guide to mortgage refinancing, your search ends here. This article will provide detailed information on various aspects of refinancing, including costs, interest rates, pros and cons, and much more.
Let's begin.
- Employment status (your current job(s) and how long you’ve worked there)
- Monthly income, broken down by sources
- Details of any other credit cards you have
- Details of any other debts or monthly obligations you have, such as a mortgage or car loan
In addition to all of this, the credit card issuer will also want to review your credit history. As part of the application process, you have to authorize them to run a background check with one of Canada’s credit-reporting agencies. The agency will provide the issuer with a copy of your credit report, including your credit score. Your credit score reflects your payment history with other debt obligations.
What is Mortgage Refinance?
A refinancing mortgage loan is a financial tool that allows you to settle your existing mortgage by obtaining another loan. This entails breaking your current mortgage arrangement and applying for a new loan, either from the same lender or a different one. The new loan typically offers more advantageous terms and often features a lower interest rate compared to your current mortgage.
Through mortgage refinancing, you can take advantage of lower interest rates, tap into your home equity, or consolidate your debts. The Bank of Canada has reduced interest rates in response to the economic impact of the COVID-19 pandemic. Consequently, if you reside in or around Ontario, Canada, it is undoubtedly a wise decision to explore mortgage refinancing options, as you can secure excellent refinancing offers at present.
It's important to note that refinancing is associated with a prepayment penalty. Therefore, it is crucial to carefully assess the implications and conduct thorough research before proceeding with a mortgage refinance application.
What are the compelling reasons to consider opting for mortgage refinance?
1. Lower Interest Rates
By refinancing your mortgage plan to secure lower interest rates, you can potentially save money in the long run. The actual savings will vary based on factors such as the prepayment penalty and the remaining balance on your mortgage. The magnitude of prepayment penalties is influenced by whether you have a fixed or variable interest rate. It's important not to be overly concerned about these penalties. Take a moment to crunch the numbers using a calculator, and you'll likely discover that even after accounting for these penalties, you can still achieve a significant amount of savings.
2. Utilizing Home Equity by Gaining Access to Cash
The equity in your home represents the disparity between the current mortgage balance and the appraised value of your property. Through mortgage refinancing, you can access up to 80% of your home's value, subtracting any outstanding debts. This money can be utilized for various purposes, such as funding your children's education, making other investments, undertaking home renovations, and more.
There are multiple avenues to tap into this equity, including:
- Breaking your mortgage
- Leveraging a home equity line of credit (HELOC)
- Combining or extending your mortgage with your current lender
3. Consolidating Debts
By leveraging a substantial amount of home equity, you have the opportunity to settle high-interest debts and avoid being burdened with long-term debt obligations. Whether you have outstanding credit card bills, car loans, or a line of credit, you can consolidate these debts using various refinance options.
Taking advantage of these benefits allows you to optimize the potential of your refinance loan, enabling you to achieve improved financial stability.
What are the compelling reasons to consider opting for mortgage refinance?
1. Lower Interest Rates
By refinancing your mortgage plan to secure lower interest rates, you can potentially save money in the long run. The actual savings will vary based on factors such as the prepayment penalty and the remaining balance on your mortgage. The magnitude of prepayment penalties is influenced by whether you have a fixed or variable interest rate. It's important not to be overly concerned about these penalties. Take a moment to crunch the numbers using a calculator, and you'll likely discover that even after accounting for these penalties, you can still achieve a significant amount of savings.
2. Utilizing Home Equity by Gaining Access to Cash
The equity in your home represents the disparity between the current mortgage balance and the appraised value of your property. Through mortgage refinancing, you can access up to 80% of your home's value, subtracting any outstanding debts. This money can be utilized for various purposes, such as funding your children's education, making other investments, undertaking home renovations, and more.
There are multiple avenues to tap into this equity, including:
- Breaking your mortgage
- Leveraging a home equity line of credit (HELOC)
- Combining or extending your mortgage with your current lender
3. Consolidating Debts
By leveraging a substantial amount of home equity, you have the opportunity to settle high-interest debts and avoid being burdened with long-term debt obligations. Whether you have outstanding credit card bills, car loans, or a line of credit, you can consolidate these debts using various refinance options.
Taking advantage of these benefits allows you to optimize the potential of your refinance loan, enabling you to achieve improved financial stability.
The Good and Bad of Mortgage Refinance?
Undoubtedly, mortgage refinance has the potential to save you thousands of dollars throughout the duration of your loan. Nevertheless, it is crucial to approach mortgage refinance as a long-term commitment that requires careful consideration.
Below is a comprehensive comparison outlining the advantages and disadvantages of mortgage refinancing:
Advantages of Mortgage Refinance
Disadvantages of Mortgage Refinance
Lower interest rates
The penalty for breaking your mortgage can be substantial.
The ability to consolidate debts at lower interest rates.
Consolidating debt, one potential drawback is that it removes the motivation to pay it down more quickly.
You can tap into your home equity without needing to contribute any funds out of your own pocket.
By accessing your home equity, you effectively increase your mortgage balance.
You have the flexibility to switch between a variable interest rate and a fixed interest rate at any time through mortgage refinancing.
It’s worth noting that swapping interest rates may not always result in financial gains.
Before consulting with your mortgage broker, it is essential to assess the advantages and disadvantages of refinancing a mortgage loan.
What are the associated costs of mortgage refinancing?
The cost of refinancing is contingent upon the approach you take with your loan. Factors such as accessing equity or reducing interest rates will impact your mortgage payment. Should you choose to break your mortgage contract mid-term to access equity or secure a lower interest rate, you will be subject to a prepayment penalty. The advantageous aspect is that you do not need to pay this penalty out of pocket; it is deducted from the equity in your home. An adept mortgage broker will incorporate all expenses associated with the mortgage into the refinance transaction.
The prepayment penalty is outlined as follows:
- In the case of holding a variable rate mortgage, you will need to remit a prepayment penalty equivalent to three months' worth of interest.
- For individuals with a fixed-rate mortgage, the prepayment penalty will be calculated based on the greater amount between three months' interest and the interest rate differential penalty (IRD).
What are the steps involved in refinancing a mortgage?
1. Terminating your current mortgage contract prematurely
If you desire lower interest rates or aim to tap into your home equity, breaking your mortgage becomes an appropriate choice. This entails terminating your existing mortgage and securing a new mortgage loan from any lender. As previously mentioned, this process involves paying a prepayment penalty, typically around three months' worth of interest or the interest rate differential.
If the benefits of your new mortgage plan outweigh the prepayment fees, you can opt to break your current mortgage arrangement.
2. Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) provides you with the flexibility to access the equity of your home as per your requirements. It functions similar to a credit card loan, with the distinction that it is secured by the equity of your house.
Consequently, HELOCs generally offer lower interest rates. If you decide to utilize funds from a HELOC, you will be responsible for making monthly interest-only payments on the outstanding amount. If this aligns well with your financial situation, opting for a HELOC may be a suitable choice.
3. Refining your current mortgage terms through blending.
If your current lender offers an attractive "blended" rate, you have the option to merge and extend your existing mortgage loan. A blended interest rate combines your current mortgage rate with any additional funds you want to borrow at prevailing market rates. It's important to note that blended rates are typically higher than other competitive mortgage rates. Therefore, before deciding to break your mortgage, compare the blended rates with the potential savings to make an informed choice.
How Much can I get With Mortgage Refinance?
The loan amount for mortgage refinance is determined based on the equity in your house. If your home has an appraised value of $375,000 and the remaining balance on your current mortgage is $175,000, then your home equity is $200,000. However, lenders typically approve a maximum of 80% of the appraised value of your home. Considering these factors, the maximum refinance credit limit would be $100,000. If you secure this loan, your new mortgage refinance balance will be $300,000.
Additionally, it’s important to note that you may need to obtain new mortgage loan insurance and cover various administrative fees. Therefore, it is advisable to carefully calculate these costs before applying for a mortgage refinance.
How Much can I get With Mortgage Refinance?
The loan amount for mortgage refinance is determined based on the equity in your house. If your home has an appraised value of $375,000 and the remaining balance on your current mortgage is $175,000, then your home equity is $200,000. However, lenders typically approve a maximum of 80% of the appraised value of your home. Considering these factors, the maximum refinance credit limit would be $100,000. If you secure this loan, your new mortgage refinance balance will be $300,000.
Additionally, it’s important to note that you may need to obtain new mortgage loan insurance and cover various administrative fees. Therefore, it is advisable to carefully calculate these costs before applying for a mortgage refinance.
The loan amount for mortgage refinance is determined based on the equity in your house. If your home has an appraised value of $375,000 and the remaining balance on your current mortgage is $175,000, then your home equity is $200,000. However, lenders typically approve a maximum of 80% of the appraised value of your home. Considering these factors, the maximum refinance credit limit would be $100,000. If you secure this loan, your new mortgage refinance balance will be $300,000.
Additionally, it's important to note that you may need to obtain new mortgage loan insurance and cover various administrative fees. Therefore, it is advisable to carefully calculate these costs before applying for a mortgage refinance.
In conclusion
The loan amount for mortgage refinance is determined based on the equity in your house. If your home has an appraised value of $375,000 and the remaining balance on your current mortgage is $175,000, then your home equity is $200,000. However, lenders typically approve a maximum of 80% of the appraised value of your home. Considering these factors, the maximum refinance credit limit would be $100,000. If you secure this loan, your new mortgage refinance balance will be $300,000.
Additionally, it's important to note that you may need to obtain new mortgage loan insurance and cover various administrative fees. Therefore, it is advisable to carefully calculate these costs before applying for a mortgage refinance.
