What is refinancing?
Refinancing a mortgage involves taking out a new loan on the equity of your home.
Home equity is the difference between the value of your home and how much you owe on your mortgage.
Here is an example: if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in home equity.
When you decide to refinance your mortgage(s), you are merely replacing your existing mortgage loan(s) with a new mortgage.
The procedures are the same as those you went through when you first bought your house. You must fill out an application, have your mortgage application approved by an underwriter, and successfully meet all other requirements before the new mortgage can be closed.
Who is refinancing for?
While there are a variety of factors that can influence your decision to refinance, it is often based on your particular situation. You might fit into one of the following categories, or your motivation might be more personal:
- Planning for retirement (using additional money)
- Travel
- Tax planning purposes
- Build a reserve of money for foreseeable needs
- Rates have dropped, so you could lower your interest rate
- To reduce the amortization period, for example, from 30 to 15 years as you get closer to retirement
- Your credit score has improved, and you’re now eligible for a lower rate.
- For financial planning purposes (ex: to max out your RRSP contribution)
- Credit and/or debt consolidation
- Home renovations
- Adding a home equity line of credit
- Investment in real estate or other opportunities
- Vacation properties
- Education costs
- Unexpected expenses
- New business/Self employment
- To fund personal projects. (Ex: buy a boat, a recreational vehicle, install a sauna, etc.)
- To assist your children on their path to home ownership
And so much more!
How does refinancing work?
Compared to buying a home, refinancing is usually a simpler process.
1- Applying
The same information you provided to your lender or another lender when you purchased the house is required when you apply for a refinance. They will evaluate your income, assets, debt, and credit score to decide if you qualify for refinancing and can repay the loan.
2- Rate
You are not required to refinance with the same lender. The relationship between you and your old lender ends if you choose a new lender, who pays off your old debt.
To find the best option for you, Budget Rates will examine and analyze mortgage interest rates offered by each lender, as well as their terms, availability, and client satisfaction ratings.
You will have the option to lock your interest rate after being approved.
3- Underwriting
The underwriting procedure starts after the lender receives your file. The lender will now confirm your financial data and ensure that everything you’ve provided is true.
A new home appraisal might be necessary.
4- Close on the new loan!
When the home appraisal and underwriting are through, it’s time to close your loan. Your lender will send you documentation with all the final loan figures a few days prior to closing, among other things.
5- At closing, you will:
o review the details of the loan
o sign the loan documents
o pay any closing costs, if applicable
It should be noted that in the case of a cash-out refinance, you will receive the money after closing.
What are the advantages?
With refinancing, you could:
- secure a lower interest rate
- reduce your mortgage payment and create more space in your monthly budget
- reduce the amortization period on your loan and pay it off sooner
- tap into your home’s equity and take out some cash at closing
- consolidate debt — Refinancing is a strategy used by some homeowners to consolidate debts including credit card debt, student loans, and other obligations into a single, manageable monthly payment
- convert a mortgage from an adjustable to a fixed rate, or the other way around.
- possibly cancel private mortgage insurance premiums to avoid paying unnecessary fees.
What are the disadvantages?
- Extending the duration of your loan could lead to more interest payments overall.
- Cashing out a portion of your equity may increase the loan amount on your new mortgage loan, which could result in a larger monthly payment.
- Closing expenses can be pricey. If you intend to sell your house before you recoup your closing costs, it might be wise to stick with your present mortgage.
- Market conditions can impact your options; there is no assurance that the new loan will have better terms. This is particularly the case when interest rates go up.
- Hard inquiries could have a negative effect on your credit score: A hard inquiry for a mortgage loan will appear on your credit report, momentarily lowering your credit score.
- Impacts credit history length: Your credit score could suffer if your existing mortgage loan is cancelled and replaced with a new one. This credit score factor accounts for 15% of your FICO® Score.
- Restarting the loan: Your current mortgage will be replaced with a brand-new one. You’re probably extending the number of years you’ll be making mortgage payments, depending on how long your present mortgage has been in place and how long your new mortgage will remain.
What do I need to get started?
- your budget
- your timelines
- your priorities
