When you get a mortgage, a lender provides you with the funds to purchase a home and, in exchange, you agree to make regular payments as set out in your mortgage contract. But what if you want to lower your borrowing costs or access more money against your home equity?
In that case, mortgage refinancing is an option, as we explain below.
Refinancing a mortgage is a financial strategy where you break your existing mortgage contract and pay the current balance in full by securing another mortgage loan. This new loan comes with its own terms and conditions, including a different interest rate than you had with the prior mortgage loan.
When you refinance, you may also be able to increase the size of your mortgage, depending on how much equity you’ve built up in the property. That’s because the loan you receive when you refinance a mortgage could be as much as 80% of the appraised value of your home.
For example, if your home is worth $500,000, you could borrow up to $400,000. If your previous mortgage balance was $350,000, you would receive the extra $50,000 as a lump-sum payment.
This method of borrowing is preferable to other types of debt, as mortgage interest rates are generally lower than other loans you may apply for either from a bank or private lender.
There are two main reasons why borrowers might want to refinance their mortgage:
The best time to refinance is at the end of your mortgage term, especially if you have a closed fixed-rate mortgage. That’s because if you refinance on a closed mortgage before your term is up, you’ll be charged a prepayment penalty. The penalty usually isn’t too steep on a variable-rate mortgage (typically three months interest) but can be much larger on a fixed-rate mortgage, especially if there’s lots of time remaining on the term.
If you wait until the end of the term to refinance (or if you have an open mortgage), you can side-step these prepayment fees entirely.
As far as refinancing your mortgage mid-term, it really comes down to whether the benefits outweigh the costs. If you’re wondering if the time is right to refinance your mortgage, ask yourself the following questions:
If you decide to pull the trigger on refinancing your mortgage, fill out your application and make sure you gather all the relevant documentation the lender will need to evaluate your eligibility. Approach each lender and ask them for a list of documents you will need, including proof of income and tax documents. This is where it helps to have a mortgage broker who can help facilitate the gathering of these documents and submit your application for you.
If you get approved, don’t just sign immediately. You should read the terms and conditions carefully, especially the details related to costs, payments and interest rate. Ask for clarity if there’s anything you don’t agree with or don’t understand.
A mortgage broker may be able to help here and negotiate on your behalf, but it’s perfectly acceptable to negotiate directly with the lender yourself. After all, a percentage point off your interest rate may give you just enough wiggle room to be able to better afford the closing costs.
If the costs of refinancing are prohibitive, there are a few other options you can consider:
» KNOW WHAT TO EXPECT: During your mortgage renewal
Aaron Broverman has been a personal finance journalist for over a decade. His work has appeared on such outlets as Yahoo Finance Canada, Bankrate and Creditcards.com, Money Under 30, Wealth Rocket, CBC.ca and Greedyrates.ca. This former Toronto transplant via Vancouver now lives in Waterloo with his wife and son.