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A home is deemed as the financial security of your life.
However, getting one is not that easy. Not everybody has the finance to purchase their dream house.
In fact, most of you have to plan your retirement considering the mortgage you have to pay.
Ever heard of the term “Refinancing?”
It is one expert way to support the funding for your home.
Additionally, it might also aid you in reducing your loan term, interest, and payments or cashing out money from your property.
Sounds like something you need? Here’s a helpful guide for you.
Refinancing - What Is It?
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It is exactly what the name suggests: “Re” “Financing.”
As per the Wikipedia database, it is to finance your mortgage or loan from a new perspective.
- You can ask your lender to readjust the interest, term, minimum payments, etc., on your loan in your favor.
- In addition, you can negotiate with the broker to renew your financial contract with terms that can help you pay the loan.
In simple words, refinancing a mortgage or loan is done to update your existing debt conditions to new and better terms.
Like, you replace your old debt with a new debt!
Refinancing - Reasons You Should Do It!
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Canadians with good Equifax credit score and report can save money on loan interest using refinancing.
However, deciding on whether to do it or not can be a daunting task.
If you are already struggling to make timely payments, how can you ever think of replacing the existing loan with a new one, right?
Well, often, there are enough reasons to take the chance. Here are some considerable ones.
1. A Chance To Reduce Your Interest Rate
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Lowering the rate of interest on your current debt is among the top reasons for refinancing.
In all honesty, refinancing is wise if you can lower your interest by 2%. In fact, for some, 1% is also the best go.
Of course, the key is to use a refinance mortgage calculator to calculate the payments and see whether or not it will benefit your case.
2. A Way To Shorten The Loan Period
If you succeed in lowering your interest rate, there’s a high possibility you can negotiate with your lender for a shortened mortgage period.
However, don’t go straight into reducing your debt term. Instead, do the math and see what works for you. For instance:
- Say you have a fixed-rate debt term of 30 years on your $200,000 home.
- Refinancing it from a 10% interest to 5% can help you shorten the term to 15 with only a little change in the actual payment.
A good deal, no? Well, here’s another scenario:
- Say you have a fixed-rate debt term of 20 years on your $100k home.
- But you already have a 5.5% interest on it.
- So, refinancing to a 3.5% and 10 years period won’t be a good option.
Of course, if you can afford to pay the now raised $715 payment from the previous $568. You can choose to do so!
Still, experts like Kristen Schmitt advise calculating everything before you make the final call.
3. A Key To Change Your Loan Type
Do you currently have an ARM type?
When you are refinancing the mortgage, you might as well benefit from every part of it.
And that one aspect is to change your loan type.
- If you had an adjustable mortgage previously, changing it to a fixed rate might reduce your interest, debt term, and overall payments.
- However, if you have a fixed-rate mortgage with higher terms, changing it to an adjustable rate might help you.
ARM to FRM:
As an ARM gradually increases the interest, changing it to a fixed-rate mortgage with favorable terms can be a good choice.
FRM to ARM:
An ARM usually starts with lower rates and changes to higher terms as the loan period advances.
So, changing your FRM to ARM might help you if there’s a considerable interest rate difference.
4. A Plan To Consolidate Debt
Refinancing can also be a good way of consolidating your debt.
Consider all your high interest on your secured credit card, debit cards, MasterCard, or on your mortgage, insurance, etc. - refinancing can get you good terms on each of them.
For instance, if refinancing even by 1% can help you pay your bills on better interest and terms, you should go for it.
See: Alternative Lending In Canada - Your Best Options!
5. An Approach To Lower Mortgage Insurance
Refinancing can help you lower your PMI.
- Most consumers pay some percentage of their insurance upfront and have to pay the rest for the entire loan period.
- Say your PMI was 2.5% at the start for your CMHC-supported mortgage.
- You paid it upfront and coordinated with the provider to pay 0.5% for the entire 25 years period.
So, when you refinance your mortgage, you get a chance to lower your PMI by changing your loan to a conventional mortgage.
Note: However, you might need to gain 20% home equity before utilizing this option.
Refinancing - When Should You Do It?
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Do mortgage payments take your entire paycheck? Does the loan take a good amount of your budgeting plan?
Yes? Refinancing might help!
So, when is the right time to refinance your mortgage?
When it will benefit you and not cause a loss for you! Simple.
- You might also have to pay the previous 6-month payments timely to refinance your mortgage.
- Also, if refinancing can help you lower the interest by a good percentage, that’s the time you should go for it.
See the refinance mortgage calculator mentioned earlier in the blog to see the reference.
Refinancing - When To Avoid It?
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If you plan to shift to a new place or your dream house in Canada, now is not the time to refinance.
Here are the reasons:
- You won’t be able to recoup the mortgage cost,
- The process can be time-consuming, and you might not get what you want,
- It can be costly for you to close the mortgage terms,
- Lastly, it might also cause a little dip in your credit score.
Of course, it will only hurt your credit score for a short time and might even benefit your history in the long run.
However, it’s better to avoid taking any risk wherever a risk factor is involved.
Refinancing - Is It Worth It?
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The simple way to find the answer to this question is by calculating the pros and cons of refinancing.
At the end of the day, If refinancing can lower your interest rate even by 0.25%, you should consider it for the following reasons:
- You can save money on every month-to-month payment as your interest rate is now reduced,
- Your shortened mortgage period allows you to pay your loan in less time so you can plan other things for your future.
- You can reduce your PMI or change your loan type to get other benefits.
So, yes, refinancing is worth it if you can get even the slightest advantage off of it.
However, not everything is all good and glorious. Yep, there’s a setback in almost anything.
Is that the case with the refinancing too? Let’s find out in the next section:
Refinancing - What Are The Odds?
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You might think it’s reducing the interest rates, so refinancing is the right option. Well, sometimes things aren’t that simple.
Yes, you have to think through everything to compare the advantages and disadvantages you can get.
So, here are some downfalls of refinancing:
1. Not Enough Saving
There’s no confirmation that you’ll save money with refinancing.
For instance, if you’re only saving $5 every month for your 10 year loan period, it might not be good for you.
2. Can Suck Up Your Energy
Refinancing is not a one-time process.
Instead, it takes months or sometimes more to negotiate with the lender and finalize the terms that work in your favor.
3. Additional Fees
Refinancing comes with a fee that might seem extra to some.
Of course, it’s understandable as you consider saving money on your existing loan. So, you might not want to spend any extra penny on it.
Still, it’s negotiable as there’s always a chance to talk with the bank or lender.
At the end of the day, the final call is always yours.
Final Thoughts
Refinancing is a good option for Canadians struggling to manage their existing mortgages and other loans.
However, it’s not a simple decision just because you feel like it.
You have to do proper research and analysis to compare the pros & cons of it. Want to know more? Read the complete guide.
