Refinancing a mortgage can be a complicated process. Figuring out when and how to refinance your existing mortgage is essential and so is knowing your options. Luckily, I’m happy to offer my insights into what you need to know before refinancing with our own how-to guide to refinancing your mortgage.
What Is Mortgage Refinancing?
If you’re looking to make any changes to your mortgage agreement, whether it be lowering your interest rate or changing your mortgage type, you will need to refinance. Why? Because your mortgage agreement is a contract, making changes will require you to pay off the existing mortgage to obtain a new one, with its new set of terms.
If this sounds like the best move for you, here’s what you need to know before you refinance your mortgage.
1. Understand Your Options
A refinanced mortgage allows you to borrow up to 80% of your home’s value. You could refinance your mortgage at any time during your mortgage term, including on its maturity/renewal date or after the mortgage has been paid in the case of accessing your home’s equity.
Reasons you may want to refinance your mortgage include:
- Adding to your mortgage amount in order to borrow more money
- Altering your mortgage term length or amortization period
- Changing your mortgage interest rate before the term is up
2. Have Your Numbers Ready
Similar to when you applied for your initial mortgage loan, lenders will need to see a satisfactory credit score to determine what interest rate for which you qualify. The better your credit score, the lower the interest rate you can obtain. So make sure your credit score is in stellar standing, contact me to learn more.
You will also want to have a good handle on how much equity is currently in your home. If your home is not worth as much as when you initially started your mortgage (dubbed negative equity), it won’t make much sense to refinance your mortgage. Luckily, this will not be the case for most, if not all, Ontario homeowners, considering the province’s real estate market has been exploding over the last few years.
Finally, you will want to determine your debt-to-income ratio before applying to refinance your mortgage. Lenders typically want to ensure your housing payments don’t exceed a certain percentage of your gross monthly income, ideally no more than 39%. But if you have a higher income, a hefty savings account balance and a stable, long-standing employment history, some lenders will take those into consideration and allow for a higher debt-to-income ratio.
3. Know Your Goal
Lowering the interest rate is probably the most common reason borrowers decide to refinance their mortgage, but it isn’t the only one. Your end goal is what is going to determine which mortgage product is best for your situation.
For example, if your goal is to lower your monthly payments, you will want to opt for a mortgage option with the lowest interest rate for the shortest term. If paying off the loan as quickly as possible is your goal, pick a mortgage with the shortest (but still affordable!) term. If you are looking to pay the lowest interest rate across the loan period, select the lowest interest rate for the shortest term.
4. Refinancing Costs
Unless you are opting to refinance your mortgage when it comes up for renewal, there are going to be unavoidable costs for doing it before your term is up.
Potential costs include:
- Mortgage registration fee
- Legal fees
- Home appraisal cost
Depending on your mortgage type, you will be required to pay a prepayment penalty if you are refinancing your mortgage before your term expires. For example, variable-rate closed mortgages carry a three-month interest payment penalty. Fixed-rate closed mortgages require you to pay a penalty fee that is equal to either the interest rate differential or three months’ worth of interest, whichever is greater. Of course, if you carry an open mortgage, there are no prepayment penalties.
Another fee you can expect to pay is what’s known as a mortgage discharge fee. This fee applies if you choose to switch to a different mortgage lender, effectively adding them to your property title and removing your old lender.
5. Refinancing Risks
Refinancing your mortgage isn’t without its risks. While your goal is to ultimately save money, the economy and housing market may have other plans. So it pays to be mindful of some of the risks faced when refinancing your mortgage.
For example, if the slight decrease in home prices we have recently experienced in Ontario due to rising interest rates continues, some may see the value of their home dip below their outstanding mortgage amount.
Another example is if interest rates continue to rise and you have just switched from a fixed-rate mortgage to a variable-rate mortgage, your monthly payments will end up increasing – quite the opposite of what you wanted when you refinanced your mortgage! These are items we discuss throughout the transaction. Be informed and contact us to learn more.
While you can’t always predict the future, being aware of the risks posed by changing market conditions will help you time your mortgage refinancing and stay aligned with your financial goals.
I’m here to guide you through every step of your mortgage refinancing! We’ll assess your goals and your current situation to show you your best options.
