Mortgage refinancing FAQ

September 6th, 2019Applying for a mortgage

Mortgage refinancing FAQ

When it comes to mortgage refinancing there can be may questions that arise. Should I consider mortgage refinancing? How does mortgage refinancing work? When should I consider refinancing my mortgage? Here is a mortgage refinancing FAQ to help answer these questions and more.

 

Mortgage refinancing FAQ

 

It can be challenging to decide if you should refinance. Especially with house prices and mortgage rules constantly changing and mortgage applications being reviewed under stricter guidelines now. In the past, one used to be able to refinance their home up to 100% of the value at the same great low interest rates that you get when purchasing a home. However, over the last few years there has been changes. For example, the maximum refinance amount can be no greater than 80% of the value of your home now. Also, many lenders are now charging a higher interest rate for a mortgage refinance than for a purchase mortgage. This is due to a refinance being an uninsurable mortgage.

Learn more: High ratio, conventional, insured, insurable and uninsurable
Learn more: Contact me to find today’s best mortgage refinance rates

There are still some great options available however for those who qualify to refinance. Also, when interest rates are declining, if the rate you have is currently higher than the rate you could achieve on a new mortgage, there may be the option to save interest with the new lower rate.

 

Should I refinance my mortgage?

Here are some questions you can ask yourself when deciding if you should refinance:

  • Has there been an increase to the value of your property and would like to borrow some of the equity that is now available?
  • Is your current mortgage rate no longer a favourable based on new lower interest rates?
  • Do you have a major purchase coming up and would rather use mortgage funds to finance it as opposed to a personal loan or line of credit? The reason for this is mortgage interest rates are typically lower than unsecured debt rates.
  • Have you renovated your home and need to reimburse yourself for the renovation costs.
  • Do you have a variable interest rate and would like to switch to a fixed rate?
  • Has there has been a change in your financial situation?
  • Would you like to consolidate debt?

If the answer to any of these questions is yes, then it may be a good time to explore mortgage refinancing options.

 

When is mortgage refinancing not a good idea?

Refinancing your mortgage may not be the best idea in the following situations.

  • The value of your property has decreased
  • You need to increase the amortization in order to afford the refinance and with that will have a mortgage for a longer period of time. In this situation you will pay more interest overall.
  • There are penalties to break your current mortgage.
  • There has been negative changes to your financial situation since you first got your mortgage such as job loss or credit challenges.
  • You have recently changed employment in a way that will affect the application negatively.
  • Interest rates have increased and by refinancing you will now have a bigger interest rate than your current one.

 

When considering refinancing you should also look to your goals. Is your goal to borrow some of the equity available from your property value increasing? Perhaps your goal is to pay off higher interest rate credit cards, loans and or lines of credit with the lower mortgage rate.

It is important to evaluate the pros and cons of a mortgage refinance. Especially if you are refinancing to take advantage of a lower interest rate. Other factors such as the penalty and fees, if applicable, need to be taken into account.

Some costs associated with refinancing may be a discharge fee to leave your current lender. This arises when looking to refinance with a new lender. Also, the cost of an appraisal to determine the current value of your property. In addition, there can be legal fees to register the new larger mortgage amount.

 

Contact me today to explore all your mortgage refinancing options

 

Is now a good time to mortgage refinance?

If it is a declining mortgage rate environment, it’s a great time to reach out to an Ottawa mortgage broker to help you calculate if refinancing can save you money. Mortgage brokers in Ottawa will be able to review the costs associated with mortgage refinancing.  They can then compare this to thevalue of the refinance and see what is the best option for you.

If the value of your house have not increased substantially since you first got your mortgage, there may not be very much funds available to refinance. For example if you bought your house a few years ago and only put 5% down, you may not have passed the 20% equity mark when looking to borrow up to 80% of the value of the home. In this case you would have to wait a little longer until you can refinance.

An example calculation to see how much you can borrow is:

  • take your approximate current house value
  • time this by 0.8 to get 80%
  • from this number minus your current mortgage amount owning
  • this number is the amount of new funds available to borrow

For example, if your mortgage balance is $200,000 and your house is worth $400,000 you could borrow an extra $120,000.

Learn more: Free property evaluation tool

It fixed rates are lower than your current variable interest rate than you may consider converting your variable interest rate into a fixed interest rate in order to secure the lower rate for a set term. For example, a 5 year fixed mortgage term.

Learn more: 5 year fixed rate mortgage

As I mentioned earlier, you should know your goals when looking at mortgage refinancing. Is your goal to borrow the equity from your increased property value or to achieve a interest rate that is lower? Perhaps you are looking to consolidate debt?

Sometimes just trying to achieve a more favourable interest rate is not a substantial enough reason to refinance. It’s important to look at the overall pros and cons of refinancing. Talking to the best mortgage broker in Ottawa can assist with discovering out the various pros and cons of mortgage refinancing. When interest rates are decreasing however if refinancing makes sense. It can be a great time to secure a lower interest rate.

If looking to switch to a another lender there can be a variety of fees to break your current mortgage. For example, to discharge the current mortgage and have your property appraised. Plus, any legal fees associated with setting up the bigger mortgage.

Learn more: What is an interest rate differential (IRD) and how is it calculated?

A mortgage broker can review options with your current lender as well as options at a variety of lenders to see what is most favourable for you.

In the time leading up to your mortgage refinance, it’s important to have your finances in order. Late payments on debts for example can affect your mortgage application as you need to apply and qualify for the mortgage refinance.

If your financial condition has weekend, this may mean that you do not qualify for a lower interest rate.

 

When does mortgage refinancing make sense?

There are many reasons to refinance such as employment changes that affect your finances and your current interest rate is now being higher than other interest rates available, for example. Also, maybe you would like to renovate your home or use the equity in your home to buy an investment property.

Learn more: Buying your first rental property

If you’re not sure if refinancing is the right option for you, mortgage brokers in Ottawa can help. They can review your finances and determine if there will be any added value from your mortgage refinancing.

Also, every few years it’s a great idea to reach out to your Ottawa mortgage broker and do a financial review. This is especially important if there have been any changes in your finances over the years.

Typically at renewal, this is a time when many people consider refinancing. However there are potential options to refinance during your mortgage term without a penalty.

Learn more: Mortgage renewal

Some of the most common reasons to refinance are when you’ve faced financial changes and you would like to either consolidate debt or reduce your mortgage payment or to obtain a lower interest rate.

Also, there may be times when you are in a variable interest rate and would now feel more comfortable in a fixed interest rate. Especially if you currently have debts with outstanding balances and the interest rate is higher than the interest rate on your mortgage. Consolidating those into your mortgage can be a good idea. With credit card interest rates over 20%, consolidating these debts can mean quite a bit of savings in interest. Plus having one payment for all your debts now can you help streamline your finances and help with budgeting.

Your home is a valuable asset and keeping it up to date is important. Mortgage refinancing can provide you the funds needed to do various upgrades to your home. These upgrades can help to increase the value of your home as well.

When refinancing, you may also want to extend your amortization which can help with cash flow by reducing the size of the mortgage payment.

 

When does mortgage refinancing not makes sense

There are some instances when it does not make sense to refinance your mortgage.

Decreased slightly because associated with refinancing might be higher than the benefits your obtain from the mortgage refinance.

If the value of your house has not increased substantially or it’s been a small amount of time since you purchased the home, there may not be any funds available through the mortgage refinance. For example if you are only able to obtain $5000 or $10,000, it may not be worth the effort or the cost. Perhaps seeking a personal line of credit is something you consider at this time.

If there’s instability in your finances, your job and more borrowing more money may not be the best option. Also, if you were thinking of selling your house in the near future, it may be best to wait.

If your goal is to pay the mortgage off as fast as possible refinancing means borrowing more money. This means a bigger mortgage which will affect the timelines in paying it off unless you increase the payment. When thinking about increasing the payment, it’s important to do a budget. The budget will help you be sure that the new payment works with your current financial situation.