Refinancing Your Home
Refinancing a mortgage refers to paying off an existing mortgage and replacing it with a new one.
Homeowners choose this strategy for a range of reasons, the most common being:
- consolidating existing financing to lower one’s monthly payment to improve cash flow or free up money for a rainy day savings fund,
- consolidating high-cost consumer debt, such as credit cards, car loans or other personal loans,
- renovating one’s residence while taking advantage of possible federal home renovation tax credits,
- setting up a home equity line of credit or “HELOC.” This approach allows you to withdraw funds as needed, when needed. A HELOC can be established for a one-time cost and accessed many times without the need to re-qualify, provided payments are kept up-to-date.
- Utilizing the CHIP program for additional retirement income. We deal with this form of specialized financing under the reverse mortgages tab.
Whatever the reason, or if you are just looking to benefit from a lower mortgage rate, it can make sense to refinance your mortgage. One tip to remember is to understand your prepayment features of your current mortgage and whether this can be factored in to decrease any penalty incurred.
Combining existing mortgages
Where the combined mortgages result in a new “conventional” mortgage:
High ratio insurance is not required. As long as you qualify with your income and credit standing, I will help you achieve this quickly and conveniently.
In both cases there is one critical consideration which causes the failure of many such refinances. The new mortgage often requires a fraction of the cash flow previously needed to service the now consolidated debt. Many who go through this process not only absorb the cash flow savings into an improved lifestyle they either re-incur debt that they paid out, or incur debt for which they now qualify or both. It is important to approach such a consolidation/re-combination of obligations with the clear and focused goal of applying all savings toward paying down the mortgage. Otherwise, the new mortgage will be a burden, rather than a solution.
Consolidating other debt
Most unsecured debt is priced by your bank at a higher rate than your mortgage in order to compensate them for the higher risk of loss if you default. For many people it only makes sense to use available home equity to pay out this debt, as it typically reduces interest costs significantly. If the total of the existing mortgage and the debt to be refinanced is less than 80% of the value of your home, and you qualify in terms of income and credit standing, refinancing your first mortgage should be a breeze.
Breaking a closed mortgage to transfer to a new lender,
A closed mortgage will typically have a penalty if you are looking to break the contract altogether. The reason is that you have signed a contract with the bank to honor a rate for a period of time which is also called a “term” . Most financial institutions will charge IRD or 3 months interest penalty. The IRD ( interest rate differential ) however is different from bank to bank. Not all banks are created equal and the penalties are much different so work with your mortgage broker to learn how your bank will calculate that cost. Once you have determined the cost, then you can review the overall savings to ensure you are going to save the the actual interest charges and or come up with a plan to decrease the fees. There is NO cost at all if you are up for renewal. Check the “prepayment” clause in your mortgage to determine your own situation, or better still, call your institution and ask them the cost of paying out in full.
Refinancing also offers borrowers the chance to shorten or extend their amortizations. Shortening a mortgage’s amortization can help homeowners build equity in a property at a faster rate, while lengthening terms can result in lower monthly payments. We at the Wilson Team can help teach you how to invest and actually help your mortgage work along side your investments. It does not always make sense to pay the mortgage down first in the financial plan.
Additionally, borrowers can decide to utilize either an variable rate mortgage or a fixed rate mortgage, weighing the advantages and disadvantages of each.
Renovations and home improvements
If you want to spend a significant amount of money on improving your home, you may be able to take out a lot more equity than you realize! We can advise you throughout this process. We will take your current mortgage amount and determine the borrowing needs and we can add the renovation costs to the mortgage. This is the perfect way to stay on top of regular maintenance items such as furnaces, roofs, electrical and of course the best way to increase the total value of your home by doing BIG renovations! This can include kitchens, floors, bathrooms, pools, finished basements and the list is endless. The new mortgage cannot exceed 80% of the appraised value, otherwise you would be looking at a construction loan. You should have little trouble getting the “top up” you need regardless of the degree of luxury you plan to add.
Accessing your properties equity
There are many ways to tap into your homes equity. Borrowers can access up to 80 percent of their home’s value, using the money for everything from home improvement to education costs. This is the best way to create more cash flow if you want to consolidate but what most people don’t realize if that every $20,000 you add onto your mortgage really only increases the mortgage payment by $100 a month. This is if you have a 20 -25 year amortization. This is why your home equity is such a great place to focus on because funds are inexpensive and it can go a very long way. This can come in the form of either a home equity loan or home equity line of credit, also known as a HELOC. We really need to go over the best options because they both come with pros and cons. The HELOC cane have higher rates and the compound interest is different but they offer lots of flexibility. The Wilson Team runs a calculation to determine what can pose as the best cost saving options based on your goals, cash flows, length of time for the funds and of course show you the best strategies and solutions.
What are the disadvantages of a mortgage refinance?
While refinancing a mortgage can save a large amount of money, it can also cost money.
Some mortgages may feature a prepayment penalty that will result in a fee for breaking its terms. This fee can be a significant amount, making it important for borrowers to find out if they will face a prepayment charge, and if so, how much. If you stay with the same mortgage lender then you can typically save the fee however you don’t keep the same rate on the new funds. The new funds are based on the current rates. Some banks will put you into a second mortgage which his called a collateral charge but it they will have a different renewal date and term than your current mortgage. It is sometimes best to take a blend and increase so that the entire mortgage stays as one term and amortization. The issue is many of the Big Banks have made changes to their mortgages and don’t offer the blend and increase anymore. If a prepayment charge will result in financial stress that will not be improved through a refinance, it may be wiser to stay with the current mortgage. The Wilson Team will guide you in the right direction and set your plan for you .
In addition, there can be legal costs associated when looking to refinance. These are typically $1000 and does not include any title changes which means when you change anyone’s name on the title of the home. You may also have an appraisal. We can use our tools and try to give you an estimate on what your home is worth upfront!
Our brokers will help you determine if breaking your mortgage to refinance and paying an early payout penalty will save you money in the long term. If so, the prepayment penalties can be absorbed into the new mortgage loan, leaving you without any out-of-pocket expenses to pay.
Now what do I do?
Borrowers should ensure that refinancing makes financial sense in the long run. They can do this by using our mortgage refinance calculator. This tool will allow homeowners to estimate a prepayment charge, find out how refinancing will affect interest and determine if debt consolidation will help their finances. Or better yet, give us a call and we can run all those numbers for you so you have an accurate comparison with what options you have. Gone are the days where banks will pay your mortgage penalty so if they say they are paying then it is always coming out of the rate they are offering.
Keep in mind for mortgage refinancing, there must be a minimum of 20 percent equity in the property and a maximum amortization of 30 years. The property must also be located in Canada.