Mortgage refinancing is a tool you can use to improve your financial future
By Steve Harrison
Over my 10 years in the mortgage industry, I’ve noticed that homeowners who refinance strategically can significantly improve their overall financial situations.
And you can do it, too. By refinancing whenever the math makes sense, you can make incremental gains that add up over time.
Why you should care about refinancing?
Whether you’re considering this option now or not, it’s important that you understand the basics. That way, when you’re faced with an unexpected financial challenge in the future, or an investment opportunity comes along, you’ll have a clear understanding of how your home equity can help you achieve your goals. The more you understand the short and long term benefits of refinancing, the more financially proactive you can be.
What is refinancing?
Refinancing is the process of ending a mortgage agreement in order to replace it with a new one. The first loan is paid off in full and a new loan is created, either with a new lender or the existing lender.
Whereas a straight switch to a new lender (also known as a transfer) can change only the interest rate or term of a mortgage, a refinance can involve increasing the total amount of the loan and/or changing the length of amortization.
- To Consolidate Debt
We often recommend our clients to refinance in order to consolidate other forms of debt they may be carrying. A mortgage is the cheapest way to borrow money, so it’s often beneficial to transfer accumulated debt — from credit cards, lines of credit, student debt, car loans — to a mortgage. This way you can avoid paying the higher rate of interest on those other forms of debt.
- To Access Home Equity
When clients need to take cash from their home equity, refinancing is the way to do it. This is a cheap way to access cash for investing in a rental property, sending a child to university, doing a major renovation, covering unexpected medical costs, or starting a business. Canadians can access up to 80 per cent of the value of their home by refinancing.
- To Achieve Long Term Goals
In some cases, refinancing can help homeowners increase their long term wealth. For example, refinancing could make it possible for a homeowner to move from their starter house or condo into a new home, while keeping the starter home as an investment property, thereby increasing their net worth over time.
Other benefits include:
- Access lower rates when rates have dropped
- Lower monthly payments
- Add a home equity line of credit
When should I refinance?
When your mortgage term is up, you have three options:
- Renewing the loan with your existing lender at a similar rate with a similar term
- Transferring your loan to a new lender at a different rate or term
When the math works out to your benefit, it’s a good time to refinance.
Unfortunately, if you have an immediate need access to your home equity, you can’t wait for the ideal time and you may be forced to break your existing mortgage. In that case, you’ll need to pay the penalties involved with breaking your mortgage. Pre-payment penalties can be significant, depending on the size of your outstanding mortgage. Still, despite penalties, it can still be beneficial to refinance.
Lenders sometimes offer refinancing promotions in which they pay the costs when you move your loan to their institution. A mortgage broker can alert you to those promotions and advise about whether the lender offering them is the right one for you.
What are the costs of refinancing?
The costs of refinancing include:
- If you’re breaking your mortgage, prepayment penalties will apply (amounts vary)
- Lawyer fees ($800-$1500)
- Discharge fees ($300-$400)
- Appraisal ($300-$400)
Occasionally, lenders will offer promotions in which they pay the costs associated with refinancing. Your broker can inform you of these temporary offers if they apply to your situation.
Do I have to qualify for refinancing?
Yes. You’ll have to apply for a new mortgage, going through the process of providing proof of income, statements of debts and assets, and credit scores to your new lender.
Is there a downside to refinancing?
If there is a risk to refinancing, it’s the temptation to continue adding to consumer debt after consolidation. Lifestyle changes are sometimes necessary in order to avoid having to refinance again.
What are the steps to refinancing?
Though some see refinancing as time-consuming, I try to make the process as simple as possible. Here’s an overview of the steps to follow with your mortgage broker:
- Review your financial situation and goals
- Find the right refinancing loan
- Review documents
- Apply for the new loan
- Await review of your application by the chosen lender
- Once mortgage is approved, broker orders an appraisal
- You sign the loan commitment
- You see your notary or lawyer, who will oversee the loan disbursement
Advice is always free. Call or email us to set up a consultation anytime.