How To Refinance Your Mortgage

Published on November 1, 2022

Understanding how to refinance your mortgage is essential if you want to access your home’s equity or lower your interest rate. You should pay attention to specific aspects. And follow best practices to ensure you walk away with a good deal.

Refinancing your mortgage is ideal when you want to tap into the equity in your home for renovations or medical costs. It also allows you to take advantage of a lower interest rate and consolidate debt. To refinance your home loan, assess your mortgage refinancing options. It’s also wise to calculate the costs involved with refinancing your mortgage.

This post will walk you through how to refinance your mortgage. We’ll also explore why refinancing your mortgage is ideal. Let’s look at what refinancing your mortgage means first.

What It Means to Refinance a Mortgage

When you refinance a mortgage, you get a new loan to settle your current mortgage. This act allows you to get a lower interest rate and access cash (equity) in your home.

You can refinance your mortgage with your present lender or find a new one. And you can borrow up to 80% of your home’s assessed value. At a minimum, you must have paid off at least 20% of your home’s purchase price.

As you look into how to refinance your mortgage, you may discover its numerous advantages. This includes allowing you to switch from a variable to a fixed rate. However, it also has drawbacks. These include higher penalties for ending your mortgage early than savings and more debt.

canada mortgage refinance - source mortgages

Reasons to Refinance Your Mortgage

Knowing how to refinance your mortgage is one thing. However, understanding why it’s a good option is another. Here are three reasons to refinance your mortgage:

1.  Access Equity in Your Home

Refinancing your mortgage gives you access to your home’s equity (or cash). You can take out a new mortgage or a Home Equity Line of Credit (HELOC) of up to 80% of your home’s value. The cash you borrow can be used to pay for home renovations, your children’s college tuition, or medical expenses.

2.  Lower Your Interest Rate

A lower interest rate drives many homeowners to refinance their mortgages. This is especially true if you took out a mortgage at a higher rate than the current interest rate. Paying less interest on your mortgage means you’ll save more money over time. This is because you’ll reduce more of the principal with each payment.

3.  Consolidate Existing Debt

Refinancing may be a good option if you have student loans or credit card debt and equity in your home. You can consolidate your existing debts and use the excess funds from refinancing to pay them off more quickly. Moreover, you’ll have one monthly payment, which may be more convenient and cost-effective than having multiple payments.

How to Refinance Your Mortgage

Learning how to refinance your mortgage can appear daunting. However, it’s a relatively simple process. Below is a brief guide to mortgage refinancing.

1.  Assess Your Mortgage Refinancing Options

While looking into how to refinance your mortgage, you may discover various ways to go about it. A lender can offer you a Home Equity Line of Credit (HELOC). This is a typical line of credit with your property as collateral, giving you access to funds up to a predetermined credit limit.

Instead of a HELOC, you can get a second mortgage. You can secure this loan against your home equity. Note that a second mortgage doesn’t make the first fall away. You’ll still have to pay off your original home loan on top of the new mortgage.

A reverse mortgage is another option. However, you must be at least 55 years of age to qualify. You can also re-borrow a portion of the prepayments you made on your mortgage.

Alternatively, your lender may offer you a blended rate. It comprises a combination of your current mortgage rate and the present market rate of the extra money you borrow. While this may appear a good option, the rate is often higher than the most competitive mortgage rates.

2.  Determine the Cost of Refinancing Your Mortgage

When considering how to refinance your mortgage, look into the costs involved. That way, you can determine if you’ll spend more than you save, guiding your decision to refinance.

Mortgage refinancing involves costs related to the new loan you take out. There are also additional costs, including:

  • Legal fees
  • Title insurance
  • Home appraisal
  • Title search

Additionally, your lender may charge you a prepayment penalty. The penalty will be three months’ interest if your mortgage has a variable rate. A fixed-rate mortgage prepayment penalty will be the larger of three months’ interest and the interest rate differential penalty (IRD).

The costs of refinancing a mortgage shouldn’t deter you from moving forward with it. Understanding the numbers allows you to see whether refinancing costs or saves money.

how to refinance a mortgage in canada - source mortgages

3.  Apply for a Loan

Once you’ve explored your mortgage refinancing options and the costs involved, you can apply for a loan. You can undertake the process on your own. This will entail approaching different lenders yourself and inquiring about the application process.

Alternatively, you can work with a mortgage brokerage like Spring Mortgage. They’ll simplify refinancing your mortgage by helping you find a lender offering more favourable terms. Thanks to their vast network of lenders, you can walk away with the best solution for your needs.

4.  Review the New Loan Agreement

Upon receiving approval for a new loan to refinance your mortgage, you must review the agreement before signing. You must read and understand the provision about interest rates and other costs.

If you need clarification during the review process, ask the lender. And suppose the interest rate is higher than you anticipated. In that case, a mortgage expert may be able to negotiate on your behalf.

Also, be wary if you notice the lender doesn’t charge upfront fees. They may charge you through a higher interest rate or a more considerable loan amount.

Takeaway

Mortgage refinancing enables you to access the equity your home has accumulated over time. You can take out a loan against your home’s equity to lower your interest rate or consolidate debt. Refinancing is also ideal if you have medical bills or your child’s university tuition to pay.

When looking into how to refinance your mortgage, you have various options to refinance your mortgage. These include a second mortgage, Home Equity Line of Credit (HELOC), or reverse mortgage. Once you decide which type of loan to apply for, assess the refinancing costs.

Upon understanding what charges you’ll incur and assessing whether they’re worth refinancing your mortgage, you can apply for a loan. Remember to review the loan agreement before signing. This will ensure you walk away with a fair deal.

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FAQs about How To Refinance Your Mortgage

Should I refinance my mortgage?

Mortgage refinancing can be your best bet over other types of debt. This is because mortgage interest rates are relatively lower than interest on other loans. However, it would be best if you only went through with refinancing when:

  • You’ve made consistent payments on your mortgage.
  • You want to switch from a variable to a fixed interest rate.
  • You have paid more than 20% of your home’s purchase price
  • You want to lower your monthly payments.

How can I save money when refinancing my mortgage?

Blend-and-extend is one of the best ways to save money when refinancing your mortgage. This is because some lenders won't charge you a penalty for ending your existing mortgage early with this option. Instead, the money you borrow will be added to your existing mortgage. Remember that some lenders will add the penalty to the new rate, so confirm their policy.

When is the best time to refinance my mortgage?

The end of your mortgage term is the ideal time to refinance your mortgage. This is especially true if you have a closed fixed-rate mortgage. You can avoid the prepayment penalty, which is much higher on a fixed-rate mortgage than on a variable-rate mortgage. Therefore, wait until the end of your mortgage term to refinance, and you'll save on prepayment fees.

How much does mortgage refinancing cost?

The cost of mortgage refinancing varies per the strategy used. You can refinance at the end of your mortgage term, saving you prepayment fees. However, you'll still incur certain costs, such as legal fees, title insurance, appraisal fees, and title search. Some lenders and/or brokers may absorb the cost of legal fees if your mortgage balance is over $200,000.

What do you need to qualify for mortgage refinancing?

Lenders will look out for the following to qualify you for mortgage refinancing:

  • An LTV ratio below 80% (or 20% equity in your home)
  • Mortgage payments less than 32% of your gross salary
  • Overall debts less than 40% of your gross income
You may also need to submit documentation to prove employment and income, including bank statements, pay stubs, and T4 slips. Some lenders may ask for your mortgage statement, notice of assessment, or property tax bill.