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.
Consolidating existing financing
Combining existing mortgages
Where the combined mortgages result in a “hi-ratio” mortgage:
If neither (or none) of the mortgages you’re combining was ever insured, but combining them results in a high-ratio situation, you’ll be required to pay an insurance premium. You need to look closely at the total savings the combination will give you, in order to determine whether this is financially worthwhile.
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,
Many closed mortgages have the feature that allows the balance to be paid out with a penalty after a certain time has elapsed on the mortgage. 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 loan terms. Shortening a mortgage’s term can help homeowners build equity in a property at a faster rate, while lengthening terms can result in lower monthly payments.
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. Both our insurers Genworth and CMHC, will insure new mortgages which are “topped up” for this purpose, and the total of your current mortgage and the new funds exceeds 80% of the current home value. Not all improvements are eligible, however. Pools and spas are typical “over-improvements” which may not qualify for a high-ratio equity take-out. Of course, if the total requirement is less than 80% of your home’s current value, 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
Another advantage to refinancing is accessing a property’s 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 can come in the form of either a home equity loan or home equity line of credit, also known as a HELOC. These types of loans often feature lower rates than traditional loans, resulting in further savings for homeowners.
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. The whole point of refinancing is to improve a borrower’s financial position, so 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.
In addition, costs associated with closing a loan will apply to a refinance.
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.
Keep in mind for mortgage refinancing, there must be a minimum of 20 percent equity in the property and a maximum amortization of 25 years. The property must also be located on Canadian soil.
When you want to further pursue refinancing and for more information contact The Wilson Team or call 613-695-9250 to speak with a mortgage professional, who can help you decide if a mortgage refinance suits your needs or simply click on the “Apply Now” button on the right.
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