What is Mortgage Refinance?
Mortgage refinancing primarily refers to swapping your current mortgage loan with a new loan for different conditions. You can consider it as restarting your whole mortgage plan with newer terms. The lender uses this refinanced deal to pay off your previous mortgage loan.
The unique part about refinancing is that it helps homeowners save on costs. In most cases, they usually refinance when they want to adjust the loan term, reduce the interest rate, or convert their fixed-rate mortgage into a variable and vice versa.
But is it appropriate for you to refinance the mortgage? Let’s find out!
Reasons for Considering Mortgage Refinance
Before you consider refinancing your mortgage, understand why you want to refinance. Here are three primary reasons why refinancing can help you out:
- Consolidate Debts: First, if your mortgage and interest rates payments are costing a fortune, it’s time to seek help and refinance your mortgage. This process will merge all debts into one and will possibly help you qualify for a lower mortgage rate, ultimately enabling you to save costs.
- Home Renovation: You can refinance and save money for a renovation. Do talk to your lender about the potential cost savings you’ll get from refinancing. This will give you a ballpark figure. You can also tap in some quick cash from your home equity and use it for renovation – a step that can increase your home’s value.
- Investments & Education: You might be in a tough spot if you’re young and have a family to support. Refinancing can help you cut down on costs by extending loan terms or reducing the interest rate. In fact, you can save up several thousand dollars. Now, you can use these savings for better alternatives, such as investments or funding a college education.
Can I Refinance My Mortgage?
Yes, but it depends on several factors.
The first is related to the loan-to-value (LTV) ratio. It’s an important measure that compares your loan’s value with your home’s appraised market value. In other words, it is a measure of the percentage of the property’s value financed by the loan.
You can refinance your mortgage if the ratio is below 80% (meaning you have more than 20% equity in your home). You can probably talk to your lender, who can calculate your LTV ratio. The lower your LTV ratio, the higher your chance of getting approved for a mortgage refinance.
The next important factor is your gross monthly income and other debts. The lender will review your salary slip or pay stub, means of identification, T4 slip, property tax bill, home insurance, mortgage statement, investment accounts (if any), and assets and calculate your debt-to-income ratio.
Another factor is your credit score. Having a good credit score is a crucial requirement that lenders assess to determine your creditworthiness and ability to pay back the loans as expected. A good credit score also increases your chance of qualifying for lower interest rates.
After considering the above-mentioned factors, the lender will be willing to lend if they are satisfied with the results of their assessment. However, in some instances, lenders might consider refinancing even when you have an LTV rate higher than 80%.
What is the Best Time to Refinance a Mortgage?
If you purchased a house recently, you should wait at least six months to qualify for a suitable mortgage refinance rate. However, we recommend you wait till the end of your mortgage before you refinance due to the prepayment penalties you could avoid.
Overall, some of the best times to refinance your mortgage is when:
- Your credit score rating is high,
- The mortgage rates in the market are at really low levels compared to your current rates,
- You’re in a tough spot and can’t bear the cost of mortgage dues.
- You intend to access your home equity to buy another property, renovate your home, fund a major project, and consolidate a higher interest loan.
- Your total savings from refinancing the mortgage outweighs the refinance costs, including closing costs and prepayment penalties.
How much does Refinancing Mortgage Cost?
Some of the costs you need to incur for refinancing your mortgage are as follows:
It’s a penalty fee your mortgage lender may charge you if you break or transfer your mortgage contract before its term, or if you pay all or more than the allowed additional sum towards your mortgage.
The minimum fee depends on the lender, and it could be at least $1000. This sum is usually calculated by considering either an amount equal to three months’ interest payment or the interest rate differential (IRD).
The IRD is mostly used when your mortgage interest rate exceeds the current interest rate and when you have not exhausted at least 5 years from your mortgage contract period.
You won’t pay the discharge fee if you stick with your initial lender. Otherwise, it can range between $200-$300 if you switch lenders.
Mortgage registration fee
The registration fee ranges between $50-$150.
This ranges between $300-500.
Legal charges can cost around $750-$1000
How Can I Refinance My Mortgage?
The process to apply for mortgage refinance is straightforward. The complete procedure of mortgage refinancing is as follows:
- First, determine if refinancing will be beneficial for you. You can utilize a mortgage refinance calculator or talk to your lender. These calculations are generally important if you have a bad credit score because a low score hinders your chances of qualifying for a better mortgage rate.
- Reach out to different lenders and compare their rates. You don’t necessarily need to stick to the same lender unless they offer a way better rate than the previous one. But if you find a better-priced lender, switch to them after paying a discharge fee.
- When you find a suitable lender, submit your application including all required support documents. It will include your basic information, employment information, income, and property details. The lender may also run a hard credit check to ensure that you’re at least in a position to pay your mortgage fees.
- After submitting the essential documents, the lender will proceed with the approval process, which can take about 2 business days to 4 weeks.
- The last step is related to property appraisal, where the lender will estimate the fair market value of your home. Many lenders need the property appraisal fee upfront, but some even offer a cash back later. Once the property appraisal is complete, you’ll receive a refinance offer from your lender.
Factors to Consider While Selecting a Mortgage Refinance Lender
Compare LendersAs mentioned earlier, remember to compare the lenders before you select one. In fact, you should do your research about the market. While comparing lenders, don’t only focus on the interest rates offered but also look at their qualifications, credibility, accomplishments, success rates, customer satisfaction, and many other factors. Plus, make sure to check their license from the Financial Services Regulatory Authority of Ontario (FSRA).
Check Testimonials & Client SatisfactionClient satisfaction and testimonials are extremely crucial factors that help weed out fraudulent lenders. Make sure to check out the social media profiles of lenders and get in touch with their previous clients for detailed, accurate reviews.
Clear Your ConfusionDon’t hesitate to ask questions from your lender. Whether you are unclear about a step in the mortgage refinance process or you’re unsure about a clause, ask it. This will clear your confusion, and it’ll help you identify whether the lender is transparent or not. Moreover, if you inquire about the refinance terms and conditions, you can identify possible loopholes that the lender wouldn’t have informed you about otherwise.
Reasons for Refinancing MortgageThere can be multiple reasons to refinance a mortgage. Below, we will explain some common reasons everyone experiences before refinancing.
Obtain Lower Interest RatesYou can save massive costs by refinancing and qualifying for lower interest rates. Plus, your property’s value changes with time. If it increases to a higher value, then it is best to refinance mortgage rates. Another factor that can lower the interest while refinancing is your credit score. Plus, you can also improve your credit score over time by taking several actions, like paying on time and reducing debt. As a result, if your credit score improves, you can qualify for a low-interest rate.
Consolidate DebtsIf you have many other outside debts, like credit cards or car loans, you can consolidate them into one mortgage debt. Consolidating will help you improve your credit score and reduce the interest rate. It will also relieve you from hefty monthly loan payments allowing you to save more and utilize the money on other necessities.
Take Advantage of Your Home EquityA home equity line of credit (HELOC), or a home equity loan, allows you to receive financing at much lower rates. So, you can build equity in your home by paying off your mortgage loan over time, making home improvements, and waiting for the real estate market’s appreciation to increase home value. If you require funds, you can refinance the mortgage and receive funds up to 80% of the fair market value of your home. You can use this cash for home renovation, investments, or to finance a big purchase, such as a car or children’s college fees.
How is Mortgage Calculated?
You can calculate it using the refinance mortgage calculator online. The tools will give you a ballpark figure in no time. However, if you want to calculate on your own, here’s how to do it.
Your mortgage payment per month will depend on a few factors. Below is the equation for correct calculations:
P = L [c(1 + c)^n]/[(1 + c)^n – 1]
In the formula above, P is the monthly payment, L is the principal amount of the loan, c represents the monthly interest rate (annual interest rate divided by 12) and n represents the total number of monthly payments (number of years multiplied by 12).
How Can I Reduce My Mortgage Rate?
Besides refinancing, you can also reduce your mortgage rate via several methods. Some of those are listed below:
- Eliminate Mortgage Insurance As soon as Possible: If your down payment was below 20% when purchasing your home, your lender might have asked you to purchase Private Mortgage Insurance (PMI). Talk to your lender or increase your home equity to eliminate this expense. It can collectively save you tens of thousands of dollars.
- Get a Fixed Rate: If you have a variable mortgage rate, converting it to a fixed rate might be better. The variable rate is widely picked because you can pay less if the market rate is low, but it can rise to unbelievably high levels if there are changes in the policy rate. On the other hand, a fixed-rate mortgage will keep your monthly payment at a constant level, regardless of changes in market values. Plus, you’ll be certain of your expenses, which can further help you budget expenses accurately.
- Extend Your Loan Term: One of the easiest methods to reduce monthly installments is by extending your loan payment term. If you have to pay $1,500/month for 12 months, extending the term to 18 months will reduce the payment to $1,000 monthly. However, this should be considered as one of the last options.
- Conduct a Reassessment of Property Tax: Property taxes can significantly impact your monthly expenses. Sometimes, the property tax is dependent upon the location of your home. If you think you’re paying high property taxes, get a tax reassessment. Who knows, you might be lucky to reduce your interest rate.
- Move to a Smaller House: If you’re in a tough spot and things aren’t working out, you can shift to a smaller home in an affordable locality as a last resort. Even though it’s a heart-wrenching step, it can significantly reduce the mortgage payment.
- Utilized your prepayment privilege room: Prepayment privilege is the sum your mortgage lender allows you to pay towards your mortgage in addition to your regular payments without any prepayment penalty.
This could help you reduce your principal sum faster and over time your mortgage rate, especially at the point of refinancing your loan.
Refinance Your Mortgage to Strike a Win-Win Deal!
If you feel you can’t handle the surmounting mortgage payments, Refinancing is your way out. Even if you don’t qualify for a low rate, you might have the option of extending your loan term to reduce monthly payments.
If you’re eager to learn more about keeping personal finances in check and reducing debts, we have got your back. From investing to maintaining tax payments, you’ll learn everything you need about financial planning.
Frequently Asked Questions
It depends on various factors. If you’re paying hefty interest and want to reduce it, refinancing can be a good choice. However, if you have a bad credit score, you should focus more on improving your score to qualify for a better interest rate.
If you are confused about mortgage renewal vs. refinance, here’s a brief answer.
When a borrower reaches the end of the mortgage term and still hasn’t paid their loan, they can apply for renewal to continue their mortgage term at a previously agreed rate. On the other hand, mortgage refinance means swapping your current mortgage deal with a different one.
Failure to pay the mortgage on time can result in undesirable consequences. Initially, the lender will charge you a late fee. But if you keep missing the payments, you may face the risk of foreclosure and of course, negative impacts on your credit score.
There are several alternatives you could consider if you believe mortgage refinancing is not feasible or ideal for you. These include opting for home equity loans or lines of credit, loan modification and debt consolidation.