Owning a home is a significant milestone for many Canadians, but the financial obligations that come with it can sometimes be overwhelming. Mortgage refinancing is a popular strategy that homeowners often consider to manage their mortgage payments effectively. In this article, we will explore what mortgage refinancing is and how it works.
What is Mortgage Refinancing?
Refinancing means that you will replace your current loan with a new loan on better terms. Refinancing allows homeowners to access the equity built up in their homes and make changes to their mortgage arrangements. The primary goal of refinancing is to obtain better loan terms, such as a lower interest rate, a longer repayment period, or to consolidate other debts.
When you take out a loan, you do so at the interest rate in effect at the time of signing. Interest rates change greatly over time.
All in all, a refinance can be an advantageous alternative to your current loan. Not only because you can enjoy a better interest rate after a refinance but also because your monthly costs will automatically be cheaper in such a case.
How does Mortgage Refinancing work?
The process of mortgage refinancing involves several steps, and it’s crucial to understand each one before deciding to refinance.
Evaluate your financial situation
Before considering refinancing, assess your current financial position. Determine your credit score, outstanding debts, and overall financial health. This evaluation will help you determine whether refinancing is a viable option for you.
Can I just go to my bank?
As a first step, you can certainly go to your current bank and ask for a refinancing of your loan. Although it is not required to do so, it is unlikely that your bank will reject your application. However, it is possible that your financial institution offers you a new interest rate that is not as advantageous as the current interest rate on the market. This is because the bank itself has to take its loss into account.
It is important to know that the bank does not actually benefit from it. Allowing refinancing causes a long-term decline in their income. On the other hand, they want to avoid switching you to another bank and thus losing you as a customer. Therefore, there is a good chance that they will accept your proposal. If the bank still says ‘no’, you can look for a financial institution offering a lower interest rate and then transfer your loan there.
If you refinance with another bank, you must take into account the costs of canceling your existing mortgage and establishing a new mortgage with your new bank.
Research and compare lenders
Explore different lenders and their offerings. Look for competitive interest rates, flexible terms, and any associated fees or charges. It’s advisable to consult multiple lenders to get the best possible refinancing deal.
Calculate your Equity
Equity is the difference between the appraised value of your home and the outstanding mortgage balance. The higher your equity, the more options you’ll have when refinancing. Generally, lenders prefer borrowers to have at least 20% equity to avoid additional costs like mortgage insurance.
Choose the right refinancing option
There are several refinancing options available to Canadian homeowners. The most common ones are:
- Rate-and-Term Refinance – This involves replacing your existing mortgage with a new one that has a lower interest rate or better terms. It aims to reduce your monthly payments and save on interest costs over time.
- Cash-out Refinance – With this option, you can borrow more than your current mortgage balance, tapping into your home equity. The additional funds can be used for various purposes, such as home improvements, debt consolidation, or investments.
- Debt Consolidation Refinance – This option allows you to consolidate multiple debts, such as credit cards, personal loans, or lines of credit, into a single mortgage. By rolling your high-interest debts into your mortgage, you can potentially save on interest costs and simplify your payments.
Submit your application
Once you’ve chosen the refinancing option that suits your needs, submit your application to the lender of your choice. Be prepared to provide supporting documents, such as proof of income, credit history, and a property appraisal.
The lender will assess the value of your property through an appraisal process. Additionally, they will review your application, financial documents, and credit history during the underwriting process to determine your eligibility for refinancing.
Closing and repayment
If your application is approved, you’ll proceed to the closing stage. At this point, you’ll sign the necessary paperwork, including the new mortgage agreement. The funds from the refinancing will be used to pay off your existing mortgage, and your repayment will begin based on the new terms and conditions.
You can book a meeting with one of our agent at Cashin Mortgages. We’ll go over all of your refinancing alternatives with you.
Please contact us at any time. We would be delighted to guide you through the process.