Your home is an investment. Refinancing can help you maximize the value of your home investment.
There are several reasons you may want to refinance, including getting cash from your home and lowering your payments.
A mortgage refinance can improve your monthly cash flow and reduce your overall cost of borrowing.
Let’s look at how refinancing a mortgage works so you know what to expect.
What Does It Mean to Refinance Your Mortgage?
Refinancing means replacing your current mortgage with a new one.
The new mortgage is typically for a higher amount, which allows you to “cash out” some of the home equity you’ve built up.
Your new maximum mortgage amount can be as high as 80% of the value of your home.
Reasons to Refinance a Mortgage
Here are the primary reasons to refinance your mortgage:
1. Consolidate Debt
If you're carrying high-interest debt, refinancing could be a good option for you.
Your new mortgage will pay off the existing one, and give you the money needed to pay off some or all of your high-interest debt.
After your debt consolidation mortgage has funded, you can use the improved monthly cash-flow to pay down your mortgage faster and be debt-free sooner, or invest it for the future each month.
Debt Consolidation Example:
This is a basic example to show the potential benefit of consolidating debt into your mortgage. Let us show you how your debt consolidation refinance could look today!
2. Access Home Equity for Home Improvements
If you're planning to renovate your home, using your home equity may be a good idea.
Taking advantage of the low-interest rates available with mortgage financing may be a better idea than borrowing from a credit card or line of credit, or drawing down your savings and investments.
3. Access Home Equity for Investing
Borrowing at a low mortgage interest rate and investing the money at a higher rate is often considered more profitable over the long run than prioritizing paying down the low-interest rate mortgage.
In fact, this is the primary way that banks and insurance companies make money – borrowing money at a low rate and investing it to earn a higher rate on that money!
4. Extending Amortization
Refinancing to extend your amortization up to 30 years is an easy way to lower your regular mortgage payments.
With your improved cash-flow position, you can invest the extra money you have each month, or just simply live more comfortably.
Alternatively, refinancing with a reverse mortgage is a great way for seniors to never need to make a mortgage payment again.
5. Lowering Your Interest Rate
If the currently available mortgage interest rates are lower than the rate on your existing mortgage, refinancing may be worth it.
Getting a new lower rate can result in lower regular payments, and help you save on your overall cost of borrowing.
This can really add up over the duration of your mortgage term.
When Does Refinancing Your Mortgage Make Sense?
Refinancing makes the most sense when the savings you will enjoy outweigh the costs of refinancing.
Because refinancing means paying off your existing mortgage early, there is a penalty to do this.
Sometimes this penalty is small compared to the immediate savings you will get – especially when paying off high-interest debt.
Sometimes, however, the penalty is too high to make it worth it.
If you’re considering refinancing, let us help you explore your options.
If it makes more sense for you to wait until your mortgage renewal when there is no penalty we’ll let you know that too.
Costs of Refinancing
The penalty for paying off your current mortgage early will apply if you refinance that mortgage while there’s still time left on its term.
The penalty can range from just 3 months of interest to as high as 4% of the remaining balance.
Besides the penalty, there are some additional costs involved when refinancing, including:
- Appraisal cost (Approximately $450)
- Legal Fees ($900 to $1800)
- Discharge Fee ($350 to $500)
These costs can be included in the new mortgage amount so they do not need to be paid for out of pocket. Plus, there is often at least one lender that has a “free refinance” promotion running to cover these costs.
Is Refinancing Your Mortgage a Good Idea?
Refinancing is a good idea when it makes financial sense.
Whether your goal is to consolidating debt or cash out your equity for another purpose, we’ll run the numbers for you and give you our honest opinion on if it’s a good idea or not.
Alternatives to Mortgage Refinancing
There are ways to access equity outside of just refinancing. Each has its pros and cons.
Mortgage Refinance vs Home Equity Line of Credit (HELOC)
Home equity lines of credit (HELOCs) work like personal lines of credit, except they are secured against your property, which means they come with lower interest rates.
We can look at the option of adding a HELOC to your property in the second position, behind your current first mortgage, to give you the money you need.
HELOCs have higher interest rates than mortgages, and they are based on the prime rate which does fluctuate when the bank of Canada makes changes.
HELOCs only require that you make interest-only payments each month.
A second mortgage is another potential alternative to refinancing your existing mortgage. Sometimes this is the better route to take.
This option may not always be available, depending on your current mortgage lender. However, we will consider it when developing the best strategy for meeting your goals.
Mortgage Refinancing Rates
Almost all rate advertisements you will see online are for insured purchases because these mortgages have the lowest rates you can get and get the most attention.
Refinance rates are higher than rates for insured purchases but are still very competitive.
Lenders frequently adjust their refinance rates to become more or less competitive, depending on their quarterly targets and capacity for taking on new loans.
Refinancing rates also depend on a few factors like; Loan-to-value, amortization length, term duration, penalty calculation, and other features.
You may have seen an extremely low rate advertised online, but beware! The mortgage that comes with that rate may come with additional penalties and restrictions that will cost you more in the long run, and at renewal time.
Due to our large volume, Dominion Lending Centres has access to discounts not available elsewhere, and we pass those savings on to you.
In some cases, we can obtain better rates from our clients' own banks than those they would have access to at their local branch. Plus, you get unbiased advice from an experienced mortgage broker that is dedicated to you.
Renewal vs. Refinance
When your mortgage is up for renewal you have a few options:
1. Take advantage of the opportunity and refinance without penalty.
Refinancing at renewal time is often a good choice if you have high-interest debt to consolidate, especially when combined with a "no-cost refinance" promotion.
2. Transfer your mortgage to a new lender offering better rates.
When you transfer your mortgage to a new lender, your remaining amortization and mortgage amount remain unchanged. The new lender typically covers the costs involved with the transfer.
3. Renew with your current lender, no paperwork required.
Renewing with your current lender is the easiest choice but you may miss out on an opportunity to improve your financial position.
Step-By-Step Process of Refinancing Your Mortgage
Refinance your mortgage in 3 easy steps:
- Apply for your refinance: With our secure online mortgage application, you can start your application process right now. We can also take your application information over the phone if you prefer.
- Review your options: We will present you with options from multiple lenders and potential scenarios.
- Close your new mortgage: In as little as 3 weeks, your new mortgage can close. Now you can enjoy improved cash flow and financial stability.
Should You Use a Mortgage Broker or the Bank?
Working with a mortgage broker is free, easy, and saves you time and money.
Brokers now originate 47% of mortgages in Canada, up from 23% in 2003. This means more and more Canadians are realizing the benefits and savings that come with using a broker.
A bank can only offer you their mortgage products, while we can check with all lenders to get you the best rate possible for your situation.
We work for you, not the bank. And, we save our clients money.
Plus, you get unbiased advice from an experienced mortgage broker that is dedicated to you, and focused on giving you an amazing experience.
You do not need to open a new bank account or make any changes to your current banking procedures.
Bottom line: Mortgage decisions are some of the most important financial decisions you'll make, and getting professional, unbiased advice from an experienced mortgage broker makes sense.