In today’s economic climate, where interest rates are influenced by factors such as inflation, it’s essential to evaluate your financial options carefully. One such option is refinancing, which can provide an opportunity to optimize your financial situation. However, before deciding to refinance, it’s crucial to consider several key factors to ensure it aligns with your goals and circumstances. In this article, we’ll explore the factors you should weigh when determining if refinancing is right for you.
According to recent data from Statistics Canada, inflation has been on the rise. In April, it surprised economists by reaching an annual rate of 4.4%, up from 4.3% previously. When inflation rises, it can prompt central banks to adjust interest rates to maintain price stability and achieve their target inflation rate, typically around 2%. As interest rates rise, borrowers may seek opportunities to secure lower rates through refinancing.
Current interest rates
Given the recent inflationary pressures, it’s crucial to evaluate the prevailing interest rates. While inflation can push interest rates higher, the central bank may also respond by keeping rates elevated to curb inflation. As a borrower, compare your current interest rate with the prevailing rates to determine if there is a significant difference. If your current loan has a higher interest rate than prevailing rates, refinancing could potentially save you money.
Additionally, when assessing whether refinancing is the right choice, consider your long-term plans. Are you planning to stay in your current home for an extended period? If so, even if interest rates have risen, refinancing to a lower rate could still yield significant savings over the long run. However, if you anticipate selling or moving soon, the short-term costs of refinancing may outweigh the potential benefits.
Understanding equity and refinancing
Equity is a valuable asset that homeowners accumulate as they make mortgage payments and experience appreciation in their property’s value. It represents the ownership stake you have in your home and can be a significant factor in determining your eligibility for refinancing. The higher your equity position, the more options and potential benefits you may have when refinancing.
Lenders consider the loan-to-value ratio when evaluating refinancing applications. LTV is calculated by dividing the outstanding mortgage balance by the home’s appraised value. A lower LTV indicates a higher equity position. A higher equity position can improve your chances of qualifying for favourable interest rates and terms. Lenders typically require a certain level of equity, around 20%, to avoid private mortgage insurance (PMI) costs. If your equity is low, you might face additional costs like private mortgage insurance (PMI).
If you initially financed your home with a down payment of less than 20%, you likely paid PMI. However, as you build equity over time, you might reach a point where refinancing can eliminate the need for PMI. This can result in substantial savings on your monthly mortgage payments.
Loan Term
Refinancing gives you the option of extending the term of your loan. For instance, if you’re looking to pay off your loan faster and save on interest costs, refinancing from a 30-year mortgage to a 15-year mortgage might be appealing. Conversely, if you’re struggling with high monthly payments, refinancing to a longer-term loan could reduce your monthly obligations. On the other hand, if you’re seeking lower monthly payments to improve cash flow, refinancing to a longer-term may be more suitable.
Closing Costs
Refinancing typically involves closing costs. Closing costs are the fees and expenses associated with finalizing a new loan. They typically include application fees, appraisal fees, title searches, insurance, attorney fees, and other miscellaneous charges. These costs can add up and range from 2% to 5% of your loan amount. It’s crucial to assess whether the potential benefits of refinancing outweigh these upfront expenses.
Here are some key considerations when evaluating refinancing in light of closing costs:
Calculate the break-even point
The break-even point is the time it takes for your monthly savings from refinancing to surpass the closing costs. To determine this, compare your current monthly payment with the new payment after refinancing. Divide the closing costs by the monthly savings to determine how many months it will take to recoup the upfront expenses. If you plan to stay in your home longer than the break-even point, refinancing may be a viable option.
Cash flow and affordability
Assess your current financial situation and evaluate whether you have the means to pay the closing costs upfront. If you’re short on cash or struggling with other financial obligations, the additional upfront expenses of refinancing may strain your budget. In such cases, it might be worth exploring options like lender-paid closing costs or rolling the closing costs into the new loan. However, keep in mind that these alternatives may result in a higher interest rate or an increased loan balance.
Understanding Creditworthiness
Your creditworthiness plays a crucial role in determining whether refinancing is the right choice for you.
Lenders consider various factors when evaluating your creditworthiness, including your credit score, credit history, income, employment stability, and debt-to-income ratio. A higher credit score indicates a lower risk for lenders, making you more likely to qualify for favourable loan terms.
Lenders typically have credit score requirements for refinancing. Refinancing could open doors to better interest rates and terms if your credit score has improved since you obtained your original loan. On the other hand, if your creditworthiness has declined, it is challenging to secure favourable refinancing options or qualify for a refinance.
With better creditworthiness, you may have access to a broader selection of loan programs or specialized refinancing options.
Call Cashin Mortgages today to discuss your refinancing options and get personalized advice from our team of experienced mortgage professionals. Remember, refinancing is a significant financial decision, and it’s crucial to consult with a trusted financial professional or mortgage advisor who can assess your unique circumstances and guide you through the process.
Take control of your mortgage and explore the possibilities with Cashin Mortgages. Contact us now for a consultation that could save you thousands of dollars in the long run.
