What is refinancing?
Refinancing is where you obtain a new mortgage to replace your existing mortgage.
When you refinance you are either one, keeping your mortgage balance as is but changing the terms, for example to a new rate or amortization, or two, you are increasing the mortgage amount by borrowing the equity available in your property.
Should you refinance?
The best step to decide if you should refinance is to look at your goal from the refinance. The most common reasons to refinance are to lower your mortgage payment or to borrow equity.
What are the advantages of refinancing?
- A main advantages of refinancing is to change the mortgage terms to align more with your current financial situation. If you are finding that you are tight with cash flow each month, refinancing to a longer amortization may allow you to decrease your mortgage payment and with that increase your monthly cash flow.
- When interest rates decrease, you can look to refinance your mortgage to take advantage of a lower interest rate and save on interest.
- Refinancing is a great way to unlock the equity available in your property.
If looking to consolidate debt, by borrowing the equity in your property you are able to use the funds towards consolidating debts that may currently be at a higher interest rate, such as credit cards. If consolidating multiple debts, you then also consolidate the payments into one mortgage payment which can be more convenient for some.
- You can also use the funds towards purchasing a second home cottage or investment property. Typically you are not allowed to borrow a down payment however if the down payment is coming from a secured resource, like a mortgage or secured line of credit, then it’s possible to use the funds for a down payment.
- Another reason to refinance is if your financial situation has improved since originally obtaining a mortgage you may be to obtain more favourable terms and rates on a mortgage.
What are the disadvantages of refinancing?
- In an increasing rate environment, the rate offered on the new mortgage may be higher than your existing interest rate.
- If your financial picture has weakened since originally obtaining a mortgage you may not qualify for the refinance or perhaps will be refinancing into less favorable terms if deciding to proceed.
- Many banks and lenders will charge a penalty to break your current mortgage. This can be avoided by waiting until your mortgage maturity date to do the refinance or looking to blend/extend/increase options with your current lender.
- A refinance typically comes with the cost of an appraisal and legal fees to register the new mortgage however some lenders will assist towards these costs.
- If adding a second mortgage component, such as a secured line of credit to your mortgage, the mortgage may become a collateral mortgage which is a non-transferable lien.
When can I refinance my house?
Many banks and lenders will want to see you in the original mortgage for at least 12 months however there are certainly exceptions to this.
In Canada, you are able to refinance your house up to 85% of the current appraised value. From there, you would minus your outstanding mortgage balance and that will be your approximate amount of new funds available to borrow. As a caution, you may find while doing this that there are no new funds available with the refinance and you will have to wait until you have built more equity in your house.
What are the steps to get started?
The best place to start is to contact me with the following information:
- Approximate house value
- Approximate mortgage balance
- How much you are looking to borrow or,
- What terms (i.e. rate, payment, etc.) you would like to achieve by refinancing
If you are unsure of the approximate value of your house, you can look online for the prices comparable houses for sale in your neighbourhood.
From there, I can guide you through the rest of the refinance process.