How To Refinance Your Mortgage

How To Refinance Your Mortgage

When investigating how to refinance your mortgage, you may plan to use the same lender or start afresh with a new one. But before you decide to refinance your mortgage, it is crucial to understand your financial position. 

It is also important to know the repercussions that come with ending your mortgage earlier, such as any additional charges that you may incur. In this article, you will learn why and how to refinance your mortgage.

Why refinance your mortgage?

Lower your interest rates

When you refinance your mortgage, you gain the advantage of potentially lowering your interest rate on your existing loan. When you reduce your interest rate, you can save money and increase the equity of your home. 

If you currently have a variable rate or fixed-rate mortgage, you may be liable to pay a penalty of three months interest when refinancing.

There are two possible approaches when thinking about how to refinance your mortgage to take advantage of a lower interest rate. The first would be to lower your interest rate and reduce your payments. The second would be to generate some capital.

Obtain some equity

As mentioned, you may want to refinance your mortgage to get access to equity in your home. For instance, you could be eligible to receive up to 70% of your property value to cover significant expenses. You can access equity on your home by taking a home equity line of credit (HELOC) or cash-out refinancing.

Before you think about how to refinance your mortgage to access this equity, it is crucial to know what you want to do with the money. It is ideal to aim towards making an investment that may bring you some profit in future.

One should avoid drawing equity through refinancing to fund recreational expenses, such as going on holiday.

Consolidate your debt

Do you have a student loan or other outstanding debts piling up and are struggling to keep your head above water? When approaching how to refinance your mortgage, you can plan to consolidate these debts. 

Gaining available equity through refinancing could help you pay off some of your existing debts. If you do not have enough equity to cover all your debt, you may at least be able to cover some or part of your existing loans.

This should result in lower monthly installments and reduced interest on any remaining outstanding debts.

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How to refinance your mortgage

Refinancing your mortgage may be the perfect solution for you, but it is important to plan before moving forward. It is a commitment that requires deep thought and understanding before you engage in it. 

Once you have your plan and are sure about your decision to refinance, you will need to investigate and engage in the process of refinancing your mortgage.

Let us take a closer look at how to refinance your mortgage and the steps involved.

Evaluate and decide

Making any major financial decision and commitment in your life is one most challenging things to do. You could see yourself either losing your money or making a profit. 

Before you approach a lender, think about why you need to refinance your mortgage. When you come up with good reasons for making this financial decision and have planned accordingly, chances are that you will go about it in the right way.

It should be noted that, if the equity in your home is currently less than 20%, you will likely not qualify for refinancing.

Do you need some money to renovate your house or buy a new property? Are you looking to settle some medical bills that have become a thorn on your side? Would you like to pay your child’s university fees? There are so many good reasons that could prompt you to inquire about how to refinance your mortgage.

Bear in mind that, while you may stand to receive some equity, refinancing your mortgage means that you are simply moving from one loan agreement to another. Borrowing money should not be seen as an escape from your current financial struggles. You could land yourself in more debt if not approached and planned carefully. 

Avoid borrowing to purchase something that will depreciate over time or something that may be considered a luxury. When you are confident that your reasons are good, and that you have a solid plan in place, it is time to act.

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Assess your financial situation

Before signing a refinancing mortgage contract, consider your current financial situation. Will you be able to pay the monthly installments? If the interest rate increases, will you still be able to cover the payments?

The amount of money you can borrow depends on the value of your house. According to the Financial Consumer Agency of Canada, your home equity is the difference between the appraised value of your home and the remaining balance of your present mortgage. 

In most cases, lenders will approve finance for approximately 80% of the appraised value of your house. Therefore, if your home’s value is $ 300,000, the amount you may be eligible to borrow would be about $ 240,000.

When determining how to refinance your mortgage, it is crucial to consider how much you need to borrow to avoid financial constraints in the future. Ensure that you borrow an amount you can afford to repay, as agreed with your lender.

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Determine your credit score

How well do you handle your finances? Will your current credit score allow for you to obtain another loan? 

Most lenders will evaluate your creditworthiness before signing a mortgage refinancing contract with you. They will assess whether you will be able to pay your mortgage installments every month, as agreed.

One of the things that determine your credit score is your debt-to-income ratio. When your debt is less than your income, your chance of approval is higher and vice versa. Your application will likely be turned down if your overall credit score is too low. 

Most lenders reject applications from people with excessive debt, unemployed individuals, or those who have filed for bankruptcy in recent years. Lenders would consider this type of applicant as high risk.

When you know that your credit score is low, the best approach is to try and improve the score before applying to refinance your mortgage. As you go about determining how to refinance your mortgage, improving your credit score will assist in gaining the lender’s trust. 

Therefore, if your credit score is not where you need it to be, make sure to improve it as much as possible before thinking about how to refinance your mortgage.

Understand your options

It is important to understand the different mortgage refinancing options available to you. This will help you with your plan and ensure that you select the best option for your needs.

Home equity line of credit (HELOC)

The HELOC allows you to borrow money against the equity you have built up in your home. It is like a line of credit that is secured by the property you. Here you can withdraw from the available credit limit and, once paid back in full, you have the option to borrow from this line of credit again.

Second mortgage

With a second mortgage, you are essentially using the available equity as a down-payment on a second home loan. In this case, you will be liable for installments for a mortgage that covers two properties: your original property and the new one you have just purchased.

Reverse mortgage 

If you are over the age of 55, you may qualify for a reverse mortgage. In this case, homeowners can apply to withdraw up to 40% of the available equity in their home. The benefit is that the amount borrowed is only payable when the property is sold after death. This is an attractive method used by retired individuals to generate some capital when needed.

Consider the cost of refinancing your mortgage

Before deciding on how to refinance your mortgage, calculate the costs you may incur in the process. Consider that you will not only have to repay the amount you borrow but will have your current expenses to deal with. 

The cost of refinancing a mortgage depends on the strategy you employ to lower the interest rate or how you will utilize the equity gained. 

Some of the costs you could incur in the processing of refinancing your mortgage include legal costs, home appraisal costs, title search fees, and title insurance fees.

An accurate calculation of the costs you could incur will help you decide whether the available options are favourable or not.

Apply for mortgage refinancing

You now have a better idea of how to refinance your mortgage to your benefit. You may choose to apply and manage the process yourself or request assistance from mortgage refinancing experts. 

First, you need to approach your lender and discuss how to go about it. Talk about the amount you want to borrow and how you will pay your installments.

Also, familiarize yourself with the documents you are required to submit with your application. Most lenders will require your proof of income and tax documentation. Once you gather all the necessary documents, submit them with your application or ask an expert to help you.

After the lender has reviewed your application and determines that you qualify for a mortgage refinancing, they will approve it. 

Be sure to read and understand the terms and conditions that come with refinancing your mortgage. Look into the interest rates and other costs involved and, if you need any clarification, do not hesitate to ask your lender or advisor.

Final thoughts on how to refinance your mortgage

As examine how to refinance your mortgage, it is crucial to understand all that is involved in getting the most out of it. 

Ensure that you are honest with yourself regarding what you can afford. Consider the terms and conditions of obtaining the loan, as well as the implications these have on your installments. 

Proper planning will place you in the best possible position to transition from your current financial obligations to your new ones, smoothly. 

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FAQs about Mortgage Refinance

What is mortgage refinancing?

Mortgage refinancing is when you pay out your current loan so that you can get a new one. It is very important to understand your financial position before you decide to refinance your mortgage.

Why do I need to refinance my mortgage?

There are a lot of reasons why you will need to refinance your mortgage. Some examples include:

  • You might want a cheaper interest rate
  • You want to change from fixed loan to variable loan
  • You might want better features in a home loan
  • You might want to access your home’s equity
Can I refinance to fund my renovation?

Yes. You might find that this can be cheaper to finance your renovation rather than personal loans. While you might receive some equity, mortgage refinancing also means that your are moving from one loan agreement to another. This is why you should plan carefully so that you don’t land on any more debt.

What do I need to start on mortgage refinance?

Just gather all the documents needed by lenders such as:

  • payslips
  • tax notice
  • employment letter
  • type of ID
  • financial and credit reports
How long will mortgage refinance take?

You can choose to apply and manage the process yourself. Most people request assistance from experts so if you decide to do this, the lender will review your application and they will be the one to approve it. It depends on which lender you choose but generally, it will take 2-4 weeks.

June 19, 2021
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