7 Steps To Refinance Your Mortgage In Canada

Mortgage refinancing allows you to pay off your existing home loan by replacing it with a new mortgage. Most homeowners ... Read more

Mortgage refinancing allows you to pay off your existing home loan by replacing it with a new mortgage. Most homeowners refinance their mortgage to decrease interest rates,  cash out a portion of their home equity, lower monthly payments by extending the mortgage term or increase monthly payments by adjusting the mortgage terms so they can fully repay the new mortgage sooner. Refinancing a mortgage can be helpful to homeowners who want to lower their debt, pay off the loan more quickly, or save money on monthly payments.

To determine if refinancing your home is the right option for you, it’s important to take into consideration both a lower interest rate and what mortgage penalties may arise. If you plan on borrowing less money or are interested in saving more on interest costs, then refinancing might be worth your while. When you refinance your mortgage, the new loan cannot exceed 80% of the total value of your home. Understanding the mortgage refinance process can be challenging. This step-by-step guide will walk you through the mortgage refinance process.

Step 1: Evaluate whether you should refinance and what type of mortgage refinancing is best for you.

Refinancing your mortgage can be a daunting and complex decision, but it is worth careful consideration before you commit due to its long-term commitment. With a mortgage refinance, you can pay off your home loan by replacing it with another loan. Most homeowners refinance in order to reduce their monthly payments or make them more affordable, or to adjust the terms of the new mortgage in order to get out from under the debt faster. Taking out a mortgage refinancing for lower rates can be worth it, but you need to figure out if this is the best option for your current situation.To find the best refinancing option, compare rates and other terms from multiple lenders before making a decision

Step 2: Assess The Current Market Rates

You should annually evaluate your mortgage to determine if you are currently paying the most competitive rates.In order for refinance to be beneficial, it is important to make sure the timing and your local market’s conditions are right before starting the process. If you’re paying more than 2.5% in interest on your mortgage or 0.75% over what’s currently available, then it’s worth calculating the potential savings of refinancing. Typically, when deciding whether or not to refinance your mortgage, you should look for a rate that is at least 1% lower than your current mortgage rate.The lower your mortgage interest rate is when refinancing, the more money you will save. To find out how much money you can save through a mortgage refinance, calculate your break-even point.

One method to evaluate whether refinancing your mortgage is worth it is the break-even point. When refinancing, there are usually closing costs and fees that you must pay upfront. You’ll want to make sure that your savings from taking advantage of lower interest rates will outweigh these initial expenses. Calculating the break-even point of refinancing is done by adding up the fees and closing costs, then dividing this sum by your monthly savings. For example: if you have $2,800 in fees and close at $140 per month, your break-even point would be 20 months from now.

Step 3: Before refinancing, make sure you can afford the monthly payments.

Refinancing a mortgage is tied to the equity in your home. Equity occurs when the remaining amount of your mortgage and house appraised value are subtracted from one another, giving you an idea of how much money you owe on your loan. With each payment and a possible rise in property value, a home’s equity increases. As the value of your home changes, so does your equity. The more valuable your property becomes over time, the higher amount of equity you will have accumulated.

Before refinancing, make sure to figure out how much money you have available to pay for the various administrative fees and the new monthly mortgage payments. To do this, you should calculate how much savings is required to pay for the upfront costs of refinancing and take a look at your finances to see what you can afford if monthly repayments increase with refinancing.

To see if you’re ready for refinancing, ask yourself these questions.

How much will I need to borrow?
What is the maximum debt I can afford?
Do I need immediate access to my equity funds or can I wait?
How much can I afford for monthly loan payments?
Will this loan still be affordable if interest rates increase?

Step 4: Understand how your credit score impacts whether or not you will be approved for a refinance loan.

Credit ratings have a significant impact on your ability to get loans, as lenders rely on the credit score to predict how good you are at handling money. Lenders may also refuse applications if the borrower is unemployed or has recently filed for bankruptcy. Private lenders will typically take into account self-employed individuals or those without a reliable income source. To make sure you’ve been properly evaluated and your credit score is accurate, compare your credit reports from different bureaus (Equifax, Experian, TransUnion). If your credit score is too low to qualify for mortgage refinancing, there are steps you can take to improve it before applying. Start by paying all bills promptly and on time so that your credit rating steadily improves over time. A higher credit score will improve the chances of refinancing your mortgage and being offered a lower interest rate, which could substantially reduce your monthly payments.

Step 5: Explore your refinancing mortgage options to see what type of loan is right for you.

Next, explore your refinancing mortgage options to find the one that suits you best. *Note: not all refinance loans will be available from each Lender.*

1. Rate-And-Term Refinance

The Rate-And-Term option for refinancing can help homeowners who are looking to meet their financial needs by either changing their monthly payments or choosing a new interest rate. By selecting a longer-term when refinancing, your monthly payments will be reduced but you’ll end up paying more interest over the life of the loan.

Mortgage rates change frequently, and the terms of your mortgage will alter if you decide to go with a variable or fixed loan. The “Rate-And-Term” Refinancing might be one of the most attractive options because it’s there for you when you need it most!

2. Cash-Out Refinance

Cash-out refinancing is a way to take cash out of your home equity to consolidate debt or make a large purchase. Cash-Out Refinance lets homeowners refinance their mortgage and take out up to 80% of equity at the same time. When you refinance with cash out, the money taken from your equity is added to the new loan balance. A cash-out refinancing option generally has a higher rate and monthly payment than other refinancing options, and it depends on your credit standing and how much you plan to take out.

3. Cash-In Refinance

Cash-In refinance allows homeowners to pay off the principal balance of their current mortgage, without prepayment penalties. The majority of lenders require that homeowners have at least a 20% equity to refinance with a maximum loan-to-value ratio of 80%. A cash-in refinance may be worth considering if you want to pay off your private mortgage insurance, qualify for a lower interest rate or keep the amount of your mortgage below a certain limit.

4. Second Mortgage

A second mortgage you can secure with your home equity. This allows you to borrow against your home’s value without having to sell it. You must both pay off the new mortgage as well as the original one, and if you default on your payments, your home may be sold off to cover your debt on both loans.

5. Home Equity Line Of Credit (HELOC)

A home equity line of credit, or HELOC, is a revolving line of credit with an interest rate much lower than that for conventional lending. It is secured by your house and cannot exceed 65% of the home’s value in Canada. A Home Equity Line of Credit can offer a buffer when your cash reserves aren’t sufficient to cover the cost of major repairs.

You can access up to 65% of your home equity using a Home Equity Line of Credit. However, your outstanding mortgage + HELOC cannot exceed 80%. With a home equity line of credit, you can use as much or as little of the HELOC as needed. Interest is only charged on the money you withdraw, and calculated daily at a variable interest rate that moves depending on Prime.

6. Loans And Lines Of Credit Secured By Your Home

If you have made payments on your mortgage in full, your lender may allow you to borrow money from this account for a short period. If you are at least 55 years old, then the reverse mortgage loan might also be an option for exploring.

Step 6: Estimate the total cost of your mortgage refinancing.

When refinancing your mortgage, you’ll be expected to pay additional fees and closing costs. Make sure that you are ready to cover the cost of all of the following:

  • The attorney’s fee (typical from 1.5%–2% of the loan amount).
  • Home appraisal fee ($200-$300).
  • Lender’s title insurance (cost range $550-650).
  • Title search fees
  • Title insurance fees
  • Any penalties if you break your mortgage early.

Buying a home often comes with complicated financial obligations. But with a little time and effort, you can determine what is in your best interest. The monthly savings potential of a loan refinance should be calculated in light of any added equity from paying off the first mortgage quickly. By taking into account the savings you stand to make over a lifetime with a new mortgage you can decide if refinancing or paying off the loan will make sense for you.

Step 7: Once approved, review the proposed mortgage agreement before you sign.

When a lender has looked over your application and approved it, be sure to carefully read through the terms of the agreement. By carefully reading the agreement you’ll be able to find out if any hidden terms might not be favourable for you. Some of these provisions may include interest rates or potential fees, among others. Keep in mind that just because they accepted your application, it does not necessarily mean you should agree to all of their conditions. You may need to negotiate with the lender to get what you want. Before signing the mortgage refinance contract agreement, it is essential to ask the mortgage expert or lender for clarification if there’s anything unclear. With a little guidance from an expert, you could also negotiate a lower interest rate or better terms with your contract.