You host a party for friends and watch everyone mingle in the backyard as you prepare food in your kitchen. After dinner, your friends gather around the dining room table for a board game. It’s a picture-perfect evening that reminds you why you bought a home in the first place.
But the next day, a pipe bursts and you’re saddled with a thousand dollar bill. Two weeks later, the deck in the backyard starts to crack and you have to call a contractor to come and fix it. Before you know it, the dinner party with your friends feels like a distant memory. Now you’re second-guessing buying your house.
If this sounds familiar, you’re not alone. Experts estimate that homeowners need to save anywhere between $1,000 to $7,000 per year for home maintenance expenses. If you don’t have that much cash sitting around in your savings account then you may need to find another way to raise the dough and fix a burst pipe or leaky roof. For you, refinancing your mortgage may be the best solution. Read on to learn exactly what it means to refinance your mortgage.
What Does "Refinance" Mean?
Refinancing is the process of securing a new mortgage on your existing house. Essentially, doing this allows you to accomplish one or more of the following things:
- lower your monthly payments
- lower your interest rate
- move into a more favorable mortgage contract
There are a few different ways to refinance your mortgage. These include breaking your contract during your current term and replacing it with a new one from a different lender, or blending and extending your current contract. Either way, refinancing is a common occurrence evidenced by the fact that nearly 20% of Canadians refinanced their mortgages last year.
Once you’ve determined that refinancing is right for you, it’s time to get kickstart the process.
How to Refinance Your Mortgage
The first step to refinancing your mortgage is to understand your goals and your options. There are a few different reasons why you may want to refinance your mortgage. Determining your “why” will help you figure out the best way to proceed. Take a look at the top two options for refinancing:
Break your Contract
Breaking your current mortgage contract essentially means that you will end your current mortgage contract and replace it with a new one. The main reason homeowners choose this option is to secure a lower interest rate. However, this may mean you’ll incur prepayment penalty fees depending on your lender’s terms.
Blend Your Existing Mortgage
Some lenders offer blended rates. This means that you can keep your mortgage rate and also borrow additional money at current market rates.
Know the Costs of Mortgage Refinancing
Once you’ve decided upon your preferred method to refinance your mortgage, it’s time to understand the numbers and the fees involved. The fees will vary depending on your specific circumstances and contract, but it’s important to prepare for them and make sure that you have access to the money you’ll need.
It’s hard to know exactly how much you’ll need to pay before speaking with your lender. It’s also important to note that if you refinance during your current term, you may be responsible for paying prepayment penalty fees. If you have a fixed rate mortgage, you’ll be paying whichever is greater: three months’ interest or the interest rate deferral, which is the difference between the interest rate on your current mortgage term and today’s interest rate for a mortgage that is the same length. If you have a variable rate mortgage, you’ll pay three months’ interest.
Don’t let fees deter you from refinancing your mortgage. Instead, make sure you’re prepared for them ahead of time to avoid any last minute frustration.
Prepare to Apply
Now that you’re financially prepared, it’s time to gather all of the necessary paperwork. Refinancing your mortgage is a big financial decision and you’ll need a lot of the same paperwork that you needed when you applied for your original mortgage.
These will help the lender determine whether or not your mortgage refinance is financially doable for you with your current income. Paystubs also show your current income and ensure that you can meet the monthly payments for your loan.
Once again, tax returns help the lender gain a better understanding of your overall financial picture. This will help determine your rates, mortgage amount and more.
Your credit report helps determine your interest rate.
You’ll need a recent mortgage statement to show your current balance, payments, interest rate and more.
Lenders are interested in understanding your overall financial picture, so in addition to viewing your income, they typically ask to view your outstanding debt as well.
After Gathering Your Paperwork...
Once you’ve gathered your paperwork, prepared for the costs and determined your reasoning for refinancing your mortgage, it’s time to begin the application process. The application process is fairly straightforward and from start to finish, it can take anywhere from two to five weeks.
In the same way that it was important to find the right mortgage lender for your original mortgage, it’s also important to find the right lender for your refinanced mortgage as well. Even though applying is the final step, it’s worth it to spend time asking questions and learning details about your unique situation.
Now it’s time to get to work and complete the checklist above. The process may feel intimidating at first, but by doing your research ahead of time and preparing your documents, you’ll be one step ahead throughout the entire mortgage refinancing process.