How to Refinance Your Mortgage
There are plenty of reasons why an Edmonton homeowner would want to refinance their home. But, getting a better interest rate on their loan is usually main driving force.
If you have a 25-year fixed-rate mortgage, then you’re effectively locked into the interest rate you started with. But refinancing allows you to essentially get a new deal with better terms or interest rates.
As a homeowner, you may wonder how to refinance your mortgage. Here's how.
What Exactly is a Refinance?
Refinancing means that you are essentially breaking the contract of your old mortgage and negotiating a new one (usually with another lender or mortgage broker). But, you may ask yourself, “Should I refinance my mortgage?” This is especially true when you consider that the penalties of breaking a mortgage contract can be costly.
There are usually three reasons why people opt to refinance their homes:
- Get a better interest rate
- Gain access to built up home equity
- Consolidate debt
- Obtain a better overall mortgage
As mentioned earlier, the primary reason most people refinance is for a better interest rate. Also, with a refinance, you can obtain up to 80% of the equity of your home in cash through various methods. You can use this for a variety of projects like adding value to your home or paying for your child’s education. Equity also allows you to consolidate and even pay off any outstanding debts.
Refinancing Your Mortgage
The refinancing process can be as long and arduous when you obtained your mortgage for the first time. You have to be patient and dutiful if you want to ensure a successful refinance. There are a few steps you should go through to start the process on the right foot:
- Check your credit score and make sure it’s good enough - if your credit has decreased since you first bought your home, refinancing can be challenging. It's always smart to go into the process prepared.
- Check your home’s value - has the market went up or down? If the market has went up, this will increase the available equity in your home and give you more cash to work with. If the market has went down and houses near you are selling for less than, it will decrease the amount of available equity.
- Check around for good refinance rates or use the services of a mortgage broker to do that for you - a mortgage broker can search the entire available market for the best rates and save you both time and money.
- Calculate whether it makes financial sense for you to go through with the process - depending on when you got your mortgage, there could be some termination fees for exiting the loan early. Call your lender and find out what they will charge for you to break the terms or work with a broker to determine what the fees might be.
- Scrounge up all the requisite paperwork (there will be a lot) - again, you want to be prepared. Having the mortgage documents that will be requested ready up front will make the entire process for you stress free. Once you have the documents into the hands of your broker, you can just sit back and let them do the work of saving you money.
- Find a rate (and terms) that works for you - keep in mind, it's not all about the lowest interest rate. Some mortgages will have better pre-payment terms that will allow you to pay down your mortgage faster over time; thus saving you money.
The key step here is calculating whether it makes financial sense. Refinancing your mortgage isn’t always the best plan if you end up having to pay extra in the long run. In order to actually achieve the refinancing goal, you can do one of three things:
- Break the previous mortgage contract completely
- Add a home equity line of credit
- Use a blended option that combines both the original mortgage and any other borrowed money
Take the Costs into Account
Again, breaking a mortgage contract will usually incur a penalty. If you don’t have the cash on hand to deal with that penalty, then it may be best to wait it out.
Some lenders offer “no-cost switch” programs. This means that the new lender will take on some or all of the costs associated with breaking a mortgage contract. Some of these costs may include:
- Early mortgage termination and penalty fees
- Legal fees for renewal
- Appraisal fees
- Processing and underwriting fees
- Title and escrow fees
- Loan origination points
I have numerous lenders who have such programs in their profile. If you want to refinance but don’t like the prospect of paying any fees, then a no-cost program might be right for you.
So, if you ask yourself, “Why should I refinance my mortgage?” the answer is clear. You should refinance your mortgage because it gives you the best shot of possibly reducing both the term and the interest rate on your original mortgage. In most cases, you can take the costs into account and find out that refinancing really does give you the best option.
What you should do now
Do you want to obtain a lower interest rate or tap into your equity? apply for a mortgage refinance.
If you are serious about learning everything involved when buying a home, visit our "Homebuyer Zone " page where you can read and download valuable checklists and resources.
If you have questions, contact us for more information.