The ability to obtain a cheaper interest rate is not the sole incentive for refinancing a mortgage. Mortgage refinancing can also be utilized to access home equity and consolidate debts.
1. Lowering the interest rate
Depending on the pre-payment penalty and the size of your existing mortgage, refinancing to achieve a lower interest rate can save you a lot of money over time. If you have a variable rate mortgage, expect to pay a three-month interest penalty, and if you have a fixed rate mortgage, expect to pay the greater of three months’ interest or the penalty for the interest rate disparity (IRD). Don’t let fines dissuade you; understanding the figures allows you to determine whether refinancing is worthwhile.
2. Obtaining equity (cash) from your house
You may be able to access the equity in your house by refinancing your mortgage. You may be able to borrow up to 80% of the value of your property, minus any outstanding debt. That’s money you can put toward investments, house improvements, or your children’s education. There are various options for gaining access to this equity, including refinancing your mortgage, obtaining a home equity line of credit (a HELOC), or mixing and extending your mortgage with your present lender.
3. Debt consolidation through refinancing
If you have enough equity in your home, you may be able to use that equity to pay off high-interest debt via mortgage refinancing. For example, if you have several outstanding obligations, such as a vehicle loan, a line of credit, or credit card bills, you may be able to combine them using one of the many mortgage refinance alternatives available.
The benefits and drawbacks of a mortgage refinancing
Mortgage refinancing is a significant financial decision that should not be taken carelessly. While a mortgage refinances has the potential to save you thousands of dollars over the life of your loan, there are hazards to refinancing that you should be aware of. The table below highlights the advantages and disadvantages of mortgage refinancing.
|The Benefits of Refinancing||The Disadvantages of Refinancing|
|Possibility of obtaining a reduced interest rate and saving money.||The penalties might be more than the savings.|
|Can combine debt for a lower total interest rate.||Consolidating debt eliminates the motivation to pay it off quickly.|
|Gain access to your home’s equity.||Using equity increases your debt.|
|Allows you to choose between a variable and a set rate.||Changing your rate type isn’t always in your best interests.|
Refinancing Your Mortgage
There are various options for refinancing a mortgage. Breaking your mortgage contract early, obtaining a home equity line of credit, or mixing and extending your mortgage with your present lender are examples.
1. Terminate your current mortgage deal early.
If you wanted to get a cheaper interest rate or access equity from your house, you would consider breaking your mortgage early. In this instance, you pay off your previous mortgage and obtain a new one from any lender. Your bank will charge you a pre-payment penalty if you break your mortgage, which is usually equal to three months’ worth of interest charges. Breaking your mortgage may still be worthwhile if you can justify the expense of the pre-payment penalty with your new mortgage rate.
2. Include a home equity loan (HELOC)
A home equity line of credit allows you to borrow against the equity in your house at your leisure. A HELOC is similar to a credit card account, but because it is a secured loan (backed by the equity in your house), the interest rates are substantially lower. If you withdraw funds from it, you will be required to make monthly interest-only payments on the outstanding sum. A home equity line of credit is available via your present lender and a small number of other lenders.
3. Combine and extend your current mortgage
Your current mortgage lender may give you a ‘blended rate,’ which is a ‘blend’ of your current mortgage rate plus any additional money you borrow at current market rates. Blended rates are nearly always higher than the market’s most competitive mortgage rates, so compare the blended rate to the savings if you break your mortgage.
Mortgage refinancing expenses
The cost of refinancing your mortgage is determined by the approach you choose to gain equity or reduce your interest rate. Whatever technique you choose, you will always incur legal fees because a lawyer must modify the financing on the title. The good news is that if your mortgage balance exceeds $200,000, many brokers and/or lenders will pay this expense.
Your lender will charge you a pre-payment penalty if you break your mortgage in the midst of your term to access equity or decrease your interest rate. This penalty is the greater of three months’ interest or the interest rate difference payment for fixed mortgage rates (IRD). This is simply three months’ interest for variable mortgage rates.
Where can I find out more about mortgage refinancing?
To properly understand whether refinancing your mortgage is a wise choice, consult with a registered Canadian mortgage broker. They will be able to examine your unique circumstances for free and assist you to understand your alternatives. If you’re ready to refinance, they can also help you locate the best rates and walk you through the process.
Use your home equity to fund your next big purchase or improvement
Assume you own a home and want to make some improvements to boost its worth and improve your family’s quality of life. This might include renovating an old kitchen, fixing leaking plumbing, or completing a basement.
Let’s imagine your money is invested in something you’d rather not touch, like RESPs or RRSPs.
One alternative is to employ the mortgage refinancing option, sometimes known as a “re-fi.”
Free up cash for repairs, tuition, high-interest loans, and other expenses
A re-fi essentially includes utilizing the equity you have built up in your home to free up cash. This money might be used for almost anything, including house improvements or other large cost, such as a car, college or university tuition, or beginning a new business. In some situations, consumers can utilize refinanced equity to pay off higher-cost debt, like as credit card debt.
The procedure of refinancing your property is pretty simple; in fact, the application is comparable to that of obtaining a mortgage.
How much money can you get?
Current restrictions enable homeowners to borrow up to 80% of their home’s appraised worth. You must, however, examine how much of your mortgage has been paid off. Essentially, the more money you’ve paid into your mortgage, the more cash you may get through a refinance.
Let’s imagine your house is worth $450,000 and you’ve been paying down your mortgage for a while, so you only have approximately $100,000 left.
In this case, 80 percent of the value of your property is $360,000, and because you still owe $100,000, you may access around $260,000 in equity.
Is it worthwhile to refinance?
Refinancing is well worth the effort and money if it frees up money in your monthly budget or lowers the overall cost of the loan.
However, there is no one method to go about it – there are several options for refinancing your mortgage. You could want to move from an adjustable-rate mortgage to a fixed-rate loan with a consistent monthly payment, or you might want to reduce the duration of your loan from 30 years to 15 years to save money on interest. You might also just switch from one 30-year mortgage to another with a cheaper interest rate.
Furthermore, refinancing allows you to eliminate PMI when you have earned 20% equity in your house.
Many homeowners choose a straight rate-and-term refinancing, which lowers their interest rate while still providing them with a reasonable repayment period. Some people prefer a smaller monthly payment in order to save money for other obligations such as college tuition or a vehicle loan.
While the rate and term options should help you save money, a cash-out refinance allows you to borrow more. With this technique, you may take out more money with the new loan to use toward other financial goals, such as paying off credit card debt (since it has a higher APR, you’ll be lowering the cost of the debt) or for a large purchase.
There are advantages and disadvantages to cash-out refinances, so consider carefully what you intend to do with the money before deciding whether to raise the amount of your house loan. Taking on extra debt makes paying off your mortgage more difficult and potentially more expensive in the long run.