How to Refinance your Home Mortgage Loan

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Should I refinance my home mortgage loan? Although it might fly under the radar for many households, this question should be asked periodically 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 the term of your loan, or tap into your home equity to free up some funds for a large purchase or to consolidate debts.

However, while replacing your existing home mortgage loan with a new mortgage presents several tempting advantages for homeowners, there are potential risks involved as well.

Let’s take a look at some of the reasons people opt for mortgage refinancing, and how they go about it, to help you figure out if you should look for a new mortgage.

What are the Benefits of Home Mortgage Refinancing?

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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 interesting financial opportunities, let’s look at each one a bit more closely.

Lowering Interest Rates

Mortgage rates are constantly changing. If they have dropped significantly since you locked in the terms of your existing mortgage loan then you can take advantage of this situation to get a new mortgage at a reduced interest rate, which will significantly lower your monthly payments. Depending on the size of your mortgage loan, even a small change in the interest rate you pay could lead to huge savings over time.

If you are wondering if the change in interest rates since you bought your home warrants refinancing your mortgage, a traditional guideline has been that if you can reduce your rate by 2% or more than it is worth the effort. But, these days, many suggest that a reduction as small as 1% could be worth it.

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 refinancing a mortgage in Ontario.

Changing Terms

By taking advantage of falling interest rates, you could also refinance your existing mortgage with one that has similar monthly payments but a significantly reduced term. By accelerating the timeframe to pay back your mortgage, your household will pay far less in interest over the years.

Alternatively, some people choose to refinance and lengthen their mortgages to help make ends meet. If you find that your current mortgage payments stretch the limits of your monthly budget, refinancing to get a longer term will lower your monthly payments and make it easier to manage your financial situation.

Converting Mortgage Types

Similar to changing terms, converting mortgage types can go in either direction. Some households convert their adjustable-rate mortgages to fixed-rate mortgages, while others go from a fixed rate to adjustable rates.

Adjustable-rate mortgages generally offer a lower interest rate than fixed-rate mortgages at the outset, 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 an adjustable-rate mortgage from a fixed-rate mortgage. With falling rates, homeowners who refinance to an adjustable-rate mortgage will benefit from reduced monthly payments. But, in the event that interest rates begin to rise, they risk increased payments.

Using Home Equity

Many homeowners don’t realize that the home equity they accumulate over time can be a powerful financial tool that can help you out of a difficult situation or provide the liquidity you need for a major purchase. If you have attained the home-equity threshold of 20%, you could refinance your existing mortgage with a larger loan and use the difference as needed.

Many people go this refinancing route to facilitate debt consolidation, where they use their newfound cash to pay off outstanding credit card debts and reign in their finances, but others take the opportunity for large purchases or investments, like home renovations. Refinancing to make use of your home equity can also be a saving grace, in the event that your household faces a financial emergency.

How to Refinance your Mortgage

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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 because they can save on the various fees involved and most lenders are willing to facilitate the process in order to retain your business.

Should you decide to refinance your mortgage, there are several options available to you. 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 costs of the penalties, this refinancing option is easily justified.

Adding a Home Equity Line of Credit

A home equity line of credit works just like a credit card, one where the limit is based on the amount of home equity you have at your disposal. But instead of having high interest rates like a credit card, the rates are far lower because they are ultimately secured by your home equity.

The upside to this option is the flexibility; the funds are there to be used if you need them, but if there is no outstanding balance then you will have no additional payments to make.

Blending or Extending your Existing Mortgage

If you choose to refinance with a “blended” rate, your lender will arrive at a rate that balances your current mortgage rate along with any additional money you borrow at market rates.

Similar to breaking your mortgage, you will have to crunch the numbers to compare the impact of the blended rate and the savings you stand to make if you refinance in this way.

If I Decide to Refinance, What are the Risks?

a dial representing risk levelBefore refinancing your mortgage, you should get a handle on all the factors involved to make sure it is the right decision for your household.

First and foremost, whichever refinancing option you choose to pursue , you will have to factor in all the associated fees in your calculation. These will typically include things such as:

  • 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, but every homeowner has to do their due diligence in this regard to make sure it works out in their favour.

Second, if you decide to refinance with an adjustable-rate mortgage then the interest rate on your loan becomes subject to change, which could mean higher monthly payments down the line.

Third, if you decide to refinance to tap into your home equity then you could become vulnerable to changes in the real estate market. If real estate values drop where you live after you refinance then you risk being responsible for a loan that exceeds the value of your home.

Evaluate your Refinancing Options

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As with any financial undertaking, all the costs and benefits of refinancing a home mortgage loan need to be accounted for in order to make the decision that is in your best financial interest. Despite having risks, the decision to refinance a mortgage loan to get a better interest rate is one that homeowners rarely regret.

If one of the mortgage refinancing options mentioned in this guide seems appealing to you but you are unsure how to proceed, contact one of the specialists at Burke Financials at 1-877-709-0709.

Burke Financial uses their network of banks, institutions, private lenders and investors to provide mortgage loan refinancing solutions for any situation. They will be able to answer all your questions related to your home mortgage loan refinancing options and help you make the decision that is in your best interest.