Should I refinance my home mortgage loan? This concept might fly under the radar for many households, but the question should be asked regularly because it could radically change your monthly finances.
When you refinance a mortgage in Ontario, you get the opportunity to lower your interest rate, shorten or lengthening the term of your loan, or tap into your home equity. This gives you the freedom to free up some funds for a large purchase or investment or consolidate your debts.
That said, while replacing your existing home mortgage loan with a new mortgage offers several enticing advantages for homeowners, there are potential risks involved. You need an experienced mortgage broker in Ontario to guide you through this detailed process.
There are several costs to consider for Canadians considering refinancing their mortgage. Let’s take a look at some of the reasons homeowners opt for this type of loan and the steps involved to help you figure out if it’s time to tap into the equity of your home.
What are the Benefits of Home Mortgage Refinancing?
To refinance a mortgage is to pay off your existing mortgage loan with a new one. There are several reasons why homeowners decide to go this route and tap into the equity in their home, including:
- Getting a lower interest rate
- Shortening or lengthening the term of their mortgage
- Converting from a fixed-rate mortgage to an adjustable-rate mortgage, or vice versa
- Raising funds for large purchases,
- Debt consolidation
- Attending to a financial emergency
These refinancing possibilities present attractive financial opportunities — particularly for homeowners interested in how to refinance a mortgage with bad credit.
Let’s look at the benefits of refinancing closely.
Lowering Interest Rates
Mortgage rates are constantly changing, which means the process of how to refinance your mortgage could change simultaneously. If rates have dropped since you locked in your current mortgage loan terms, you can take advantage of this situation. As a homeowner, you have the opportunity to get a new mortgage at a reduced interest rate, which will significantly lower your monthly payments. Depending on your mortgage loan size, even a small change in the interest rate you pay could lead to significant savings over time.
You may be wondering if the change in interest rates since you bought your home warrants refinancing your mortgage. A traditional guideline that we suggest to determine this is, if you can reduce your current rate by 2% or more, it is worth the effort. Many suggest that a reduction as small as 1% could be worth it these days.
To verify how current interest rates and financial trends can affect your mortgage, it is often best to consult with an expert with plenty of experience. With their guidance, they can walk you through the process and explain how to refinance a first or second mortgage.
By taking advantage of falling interest rates, you could also refinance your existing mortgage with one that has similar monthly payments. These new payments would include a significantly reduced term. By accelerating the timeframe to pay back your mortgage, your household will pay much less in interest over the years.
Alternatively, some people choose to refinance and lengthen their mortgages to help pay their bills and cover necessary expenses. If you find that your current mortgage payments stretch your monthly budget limits, refinancing to get a longer-term solution will lower your payments and make it easier to manage your financial situation.
Converting Mortgage Types
Similar to changing terms, converting different mortgage types can go in either direction. Some households convert their variable-rate mortgages to fixed-rate mortgages and vice-versa. It’s essential to consult with a financial expert before choosing either option. The role of a mortgage broker is to connect borrowers with a lender that can offer them the best possible rate and the resources they need to meet their financial goals.
Variable-rate mortgages generally offer a lower interest rate than fixed-rate mortgages initially, but increases over time can upend that situation. When rate changes add up, going for a fixed-rate mortgage can get you a lower interest rate on your new mortgage loan. With a lower rate locked in, you won’t have to worry about how interest rates change.
On the other hand, if interest rates decline, homeowners could capitalize on the situation by converting to a variable-rate mortgage from a fixed-rate mortgage. With falling rates, homeowners who refinance to an adjustable-rate mortgage will benefit from reduced monthly payments. However, if interest rates begin to rise, they could risk increased expenses.
Using Home Equity
Many homeowners don’t realize that the home equity they accumulate over time can be a powerful financial tool. Your equity can be used to help you out of a problematic situation or provide the capital you need for a significant purchase. If you’ve earned the home-equity threshold of 20%, you could refinance your existing mortgage with a larger loan and use the difference as needed.
In Ontario, homeowners often choose this refinancing route to facilitate debt consolidation. They use their equity to pay off outstanding credit card debts and strengthen their finances. Others take the opportunity for large purchases or investments, like home renovations.
Refinancing to make use of your home equity can also be your saving grace if your household faces a financial emergency. This is often a beneficial tool for homeowners wondering how to refinance their mortgage with bad credit.
How to Refinance your Mortgage
One of the common questions homeowners ask is how soon they can refinance their mortgage. In general, banks and lenders require that you maintain your original mortgage loan conditions for at least a year before refinancing options become available. This, of course, depends on your situation, so you should consult your lender to learn about your specific conditions or restrictions.
Although it is not required, many people decide to refinance their mortgage through their original lender rather than shopping for a new one. They can often save on the various fees involved, and most lenders are willing to facilitate the process to retain your business.
Should you decide to refinance your mortgage, there are several options available. You could break your existing mortgage early, take out a home equity line of credit, or blend and extend your existing mortgage with your current lender.
Let’s take a look at each option in greater detail.
Breaking Early to Refinance
Ending your mortgage early to seek better rates with another lender is one potential option that makes sense for lots of homeowners but figuring out if it is worth the hassle and associated fees comes down to the specifics of your situation.
Breaking your mortgage early will incur penalties, but if the potential savings offered by a lower interest rate are more than enough to cover the penalties’ costs, this refinancing option is easily justified.
Adding a Home Equity Line of Credit
A home equity line of credit works like a credit card, one where the limit is based on the amount of home equity you have at your disposal. Although, instead of having high-interest rates like a credit card, the rates are far lower because they are ultimately secured by your home equity. This is a useful option for homeowners inquiring how to refinance a mortgage with poor credit.
The upside to this option is the flexibility. The funds are there to access if you need them, but you will have no additional payments to make if there is no outstanding balance.
If I Decide to Refinance, What are the Risks?
Before refinancing your mortgage, you should get a handle on all the factors involved to make sure it is the right decision for your household. Understanding the risks involved when you inquire how to refinance a mortgage with poor credit is essential, so you know all of the details involved with this important financial decision.
First and foremost, whichever refinancing option you choose to pursue, you will need to factor in all the associated fees in your calculation. These will typically include:
- Appraisal costs
- Legal fees
- Potential prepayment charges
- Discharge fees
In some cases, these costs are easily covered by the potential savings you stand to make when you refinance. Every homeowner must do their due diligence to benefit their current financial situation.
Second, if you decide to refinance with an adjustable-rate mortgage, your loan’s interest rate becomes subject to change. This could mean higher monthly payments down the line.
Third, if you decide to refinance to tap into your home equity, you could become vulnerable to changes in the real estate market. If real estate values drop where you live after you refinance, you risk being responsible for a loan that exceeds your home’s value.
Evaluate your Refinancing Options
As with any financial undertaking, all the costs and benefits of refinancing a home mortgage loan need to be accounted for to make the decision that is in your best financial interest. Despite having risks, asking how soon you can refinance your mortgage to get a better interest rate is a question homeowners rarely regret.
If one of the mortgage refinancing options mentioned in this guide seems appealing to you, but you’re unsure where to begin, contact one of the specialists at Burke Financials at 1-877-709-0709 or apply online today.
Burke Financial uses its network of banks, institutions, private lenders and investors to provide mortgage loan refinancing solutions for any situation. Our award-winning team will answer all of your questions about your home equity and show you exactly how to refinance a second mortgage. They’ll help you make the decision that is best for your financial future.