Oh my, qualifying, renewing, and refinancing! Mortgages may seem like a riddle. Fortunately, things aren't always as difficult as they seem. If you're feeling overwhelmed, you have a lot of tools at your disposal, such as the advice of your REALTOR®.
Let's look closely at the mortgage refinancing process, including what it involves, when it happens, and why it happens.
What exactly is refinancing?
To put it simply, when you refinance a mortgage, you end the old loan agreement and start a new one. You can use it to adjust your mortgage's length, rate type (fixed or variable), and monthly payment amounts. Think of it as a "restart" button. Alternatively, you can continue with your current lender. Through refinancing, you can use the equity in your home to pay for bigger expenses.
If the state of the economy or your personal situation has changed since you signed your mortgage, you may consider refinancing.
Many distinct factors influence people's decision to refinance. One of the most common reasons for refinancing is to get a lower interest rate. However, perhaps the kids have moved out, interest rates have changed since you signed your mortgage, or you have a new job and additional money, allowing you to pay off your house more quickly. Refinancing is one way to change your mortgage to fit your needs and the changing economy.
Refinancing differs slightly from renewing a mortgage. If you don't pay the remaining sum in full, your mortgage will need to be renewed at the end of each term. Refinancing is when you get rid of your current mortgage and get a new one in its place. This can be done at any time before the end of your term.
Mortgage refinancing options
There are many ways to refinance your mortgage, and each one is different depending on what you need. The most typical refinancing alternatives are shown below:
Term-and-Rate Refinancing
Refinances that alter both the interest rate and the term of your loan are known as rate and term refinances. By lowering interest rates, you may be able to pay off your mortgage more quickly or lower your monthly payments. With a shorter term, your monthly payments may be a little higher, but you'll pay off your house faster.
Cash-out remortgage
With a cash-out refinance, you can get the money you've saved from the equity in your home. You can use this money to start an investing plan, pay for college, finance big home improvements, or pay for any other significant expenses in your life.
Consolidation of debt refinancing
Similar to a cash-out refinance, a debt consolidation refinance involves taking money out of your house to pay off other debts. Utilizing your mortgage to pay off credit card debt or school loans can save you money in the long run because mortgage interest rates are typically lower than those on other debts.
Does refinancing make sense for you?
You might be tempted to push the restart button on your mortgage now that you are aware of its presence. There are certain things to think about, before you jump in.
You should talk to your lender to find out if you are eligible, since refinancing means getting a new mortgage in place of your old one. Usually, they'll consider your debt-to-income ratio and credit score, so you'll have to present evidence of your income and expenses in the form of tax bills, an assessment notice, and other pertinent paperwork. Before approaching your lender about refinancing, it's a good idea to evaluate your financial situation. Your credit score may have an impact on the rate you qualify for.
Before you decide to refinance, you'll also need to have a certain amount of equity in your house. Lender requirements will differ, but for the most part, refinancing calls for 15% to 20% of home equity. This is why it's best to put off refinancing until after you've lived in your house for a while.
It has a penalty clause, just like any other contract. However, if you decide to refinance at the appropriate time, it can still be worthwhile in the end.
Before you decide to refinance, it is usually a good idea to consult with your lender or financial advisor. Most of the time, you have to pay a fee and extra closing and legal costs if you want to get out of your mortgage early. Especially if you're refinancing for a lower interest rate, the goal is to avoid being frightened by those fees. If you do your research, your refinance could still end up saving you money in the long term, even though it may initially cost you some money.
The Bank of Canada increased interest rates once again earlier this week. Do not panic if you intend to remortgage this year. Even if you don't enjoy negotiating, it's a necessary step in the refinancing process. Ask your bank or lender for assistance if you're approaching the end of your term because they may be willing to forgo further fees. Don't be scared to shop around for better rates or discuss your alternatives with your lender because refinancing also gives you the option of selecting a different lender if you so desire.
Contact your Realtor if you're thinking about refinancing or need a mortgage professional.
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