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Mortgages of Canada has quickly become one of the fastest growing and most reliable mortgage brokerages in the country. With more than 14 years of experience in home mortgages, refinancing, debt consolidation and home equity loans, Samantha and her team offer flexible solutions tailored to meet your needs. At Mortgages of Canada, our customers are at the center of everything we do.
We pride ourselves on our responsiveness to your inquiries and work to make the mortgage application process as simple as possible, knowing that understanding your mortgage options can be complex, it’s our goal to make sure you have everything you need to make the right choices.
Why You Should Choose Mortgage Refinancing
If you live anywhere around Ontario, Canada, your friends must have surely advised you to refinance your mortgage. To be honest, you must go with their advice as the Bank of Canada slashed interest rates to one of the lowest since 2016. Now, you know why there is hype for refinancing mortgage.
Mortgage refinance refers to breaking your existing mortgage and taking on a new mortgage loan. If you want to leverage upon the lower interest rates, get access to home equity, or consolidate your debt, a refinance mortgage loan is for you.
You may argue – why should I opt for refinancing when banks are allowing homeowners to defer their mortgage payments? Well, this isn’t a perfect solution, as your loans will still generate interests while on pause.
If you are looking for a complete mortgage refinancing guide, your search ends here. This article will walk you through every aspect of refinancing, be it costs, interest rates, pros and cons, and whatnot.
Let’s get started.
What is Mortgage Refinance?
A refinancing mortgage loan is a financial widget that allows you to pay your existing mortgage by securing another loan. You break your current mortgage plan and apply for a new loan, either with the same lender or another. This loan has more favorable terms and mostly a lower interest rate than your existing mortgage plan.
With mortgage refinance, you can benefit from the lower interest rates, access your home equity, or consolidate your debts. The Bank of Canada slashed the interest rates to cushion the economic impact of the COVID-19 pandemic. Thus, if you live anywhere around Ontario, Canada, it is a no-brainer for you to apply for a mortgage refinance; you can get the best refinancing deals now!
Nevertheless, refinancing is tied to a prepayment penalty. So, it is better to gauge the consequences and do thorough research before you apply for a mortgage refinance.
Why Should You Opt for Mortgage Refinance?
1. Lower Interest Rates
You can refinance your mortgage plan for lower interest rates to save money over time. The savings depends on the prepayment penalty and your outstanding mortgage debt. Moreover, the prepayment penalties depend on whether you hold a fixed interest rate or a variable interest rate.
You must not panic about these penalties. Just hold your calculator and do the math, you would see that you are saving a decent amount of money even after paying these penalties.
2. Accessing Equity (Cash) in Your Home
The equity of your home is the difference between the present mortgage balance and the appraised value of your residence. Mortgage refinance will give you 80% of your home’s value minus any outstanding debts. You can use this money for your children’s education, other investments, home renovation, etc.
There are several ways to access this equity –
- Breaking your mortgage
- Leveraging the home equity line of credit (a HELOC)
- Combining or extending your mortgage with your existing lender
3. Consolidating Debts
If your home equity is high, you can use this amount to pay your high-interest debts. This will save you from a lifetime subscription of debts. Suppose, you have various other loans such as car loans, a line of credit, outstanding credit card bills, etc.; you can consolidate this debt with a variety of refinance options.
With several such benefits, you can make the most of your refinance loan.
The Good and Bad of Mortgage Refinance?
There is no denying that mortgage refinance will save you thousands of dollars over your loan period. However, mortgage refinance is a long-term commitment that must not be taken in haste.
Here’s a side-by-side comparison of the pros and cons of mortgage refinancing –
| Advantages of Mortgage Refinance | Disadvantages of Mortgage Refinance |
|---|---|
| Lower interest rates | Penalty to break mortgage can be high |
| Ability to consolidate debts with lower interest rates | Consolidating debt removes the incentive to pay it down faster |
| You can access your home equity without coming out of pocket | Accessing your home equity increases your mortgage balance |
| You can swap between a variable interest rate and a fixed interest rate at anytime during your term | Swapping interest rates is not always profitable |
| Advantages of Mortgage Refinance |
|---|
| Lower interest rates |
| Ability to consolidate debts with lower interest rates |
| You can access your home equity without coming out of pocket |
| You can swap between a variable interest rate and a fixed interest rate at anytime during your term |
| Disadvantages of Mortgage Refinance |
|---|
| Penalty to break mortgage can be high |
| Consolidating debt removes the incentive to pay it down faster |
| Accessing your home equity increases your mortgage balance |
| Swapping interest rates is not always profitable |
You must evaluate the pros and cons of refinancing mortgage loan before speaking to your mortgage broker.
What Will Mortgage Refinance cost?
The cost of refinancing is dependent on how you plan your loan. For instance, how you access equity or lower your interest rates will determine the mortgage payment. If you break your mortgage contract in the middle of your term to access equity or reduce your interest rate, you will be required to pay the prepayment penalty. The good news about this is that you don’t actually have to come out of pocket to do so. The penalty is taken from the equity in your home. If your mortgage broker knows what they are doing, they include all the expenses for the mortgage to be included in the refinance transaction.
The prepayment penalty is as follows –
- If you hold a variable rate mortgage, you will be required to pay a three months’ interest.
- If you have a fixed-rate mortgage, you will be paying the greater of three months’ interest or interest rate differential penalty (IRD).
Apart from the borrowed amount, refinancing also involves other costs such as –
- Home appraisal costs
- Title search fees
- Title insurance fees
- Legal costs (If your mortgage balance exceeds $200,000, many brokers or lenders cover this cost)
- Legal fees
- Broker fees
- Lenders fees
Calculating a total sum of your refinancing expenses will allow you to evaluate how good (or bad) the loan options are. The only fee that you will need to come out of pocket for is the appraisal. Everything else should be rolled into the refinance transaction.
How To Refinance Mortgage?
1. Breaking Your Existing Mortgage Contract at an Early Stage
This option is best suited if you want lower interest rates or wish to access home equity. Breaking your mortgage involves terminating your current mortgage and taking up a new mortgage loan with any lender. As discussed earlier, this requires you to pay prepayment penalty, which amount to around three months of interest or interest rate deferential.
If your new mortgage plan justifies the prepayment fees, you can choose to break your current mortgage plan.
2. Home Equity Line of Credit (HELOC)
HELOC is a line of credit that gives you access to the equity of your house at your choice. Think of this as a credit card loan. The only difference is that this loan is secured as it is backed by the equity of your home.
As a result, HELOC’s have lower interest rates. If you choose to take money from HELOC, you will have to pay monthly interest-only payments on the outstanding amount. If this option suits your balance sheets, you may opt for HELOC.
3. Blending Your Existing Mortgage
If your existing lender provides you with a decent ‘blended’ rate, then you may choose to combine and extend your current mortgage loan. A blended interest rate is a combination of your current mortgage interest rate and any additional money you wish to borrow at current market rates. Mostly, the blended rates are higher than any other competitive mortgage rates. Thus, compare the blended rates against the savings before you break your mortgage.
How Much can I get With Mortgage Refinance?
After crunching all these numbers, your refinance credit limit values at $1,00,000. If you manage to get this loan, you will owe $3,00,000 on your mortgage refinance.
Moreover, you will be required to get a new mortgage loan insurance while paying for various administrative fees. So, it is better to do the math correctly before you apply for a mortgage refinance.
Wrapping Up
Mortgage refinancing can surely help you navigate if you are having a difficult time managing your expenses. Also, it’s high time to apply for a mortgage refinance. The Bank Of Canada lowered the interest rates by a high margin and thus, mortgage refinances are available at never-before rates.
Moreover, mortgage refinance saves you money, gives you access to your home equity, and also an opportunity to consolidate your debts.
Nevertheless, refinancing is a long-term responsibility but it’s also the a really good option when money is tight and you need relief from carrying all your credit card debt.
