If you are a homeowner, you have probably come across the term “mortgage refinancing” at some point or another in the financial news, or on advice blogs for homeowners. Mortgage refinancing is often discussed as being a great option for securing a lower interest rate, or getting lower monthly payments.
But what is refinancing a mortgage? What does refinancing a mortgage mean? When is it worth refinancing a mortgage? And what can you gain by refinancing your mortgage?
It is important for homeowners to understand these questions, as answering them can have a major impact on one’s financial position — and can create new opportunities for handling things like debt, repairs, and renovations.
To that end, we have created a short guide to understanding mortgage refinancing and how it works.
What is Mortgage Refinancing?
As the name suggests, mortgage refinancing is a process by which an existing mortgage is replaced by a new one, usually at a lower rate of interest. Unlike home equity loans or second mortgages, which are additional loans taken out against home equity, when you refinance your mortgage you still only have one debt to pay off.
But if you research how to refinance your home mortgage loan you will discover that refinancing also opens up a range of other opportunities that could radically change your financial situation, including:
- Debt consolidation
- Lengthening payment period
- Taking advantage of lower interest rates
Below, we will discuss these options in depth, explore who can benefit most from refinancing, and address perhaps the most important question: when is it worth refinancing a mortgage? Before we can get into the details, however, it is first necessary to understand the relationship between refinancing and home equity.
How Refinancing Turns Equity into Cash
What is refinancing a mortgage for debt consolidation purposes, and what are the advantages of doing so? To answer this question, it is first necessary to understand how home equity builds up over time.
Home equity essentially refers to the percentage of your home’s value you currently own. It can be calculated by taking the current market value of your home and subtracting what you currently owe on your mortgage. If you could sell your home for $500,000, and your mortgage is currently at $300,000, then your equity is $200,000.
Home equity rises and falls based on market forces and your mortgage payments, so it is normal for equity to fluctuate over time. But if you purchased a home in a growing real estate market, you are almost guaranteed to see significant profit over time (this is one of the reasons you might want to consider mortgage refinancing in Toronto — given how rapidly property prices have risen over the past decade, your home equity could have doubled simply due to rising demand).
Refinancing your home gives you the option of accessing some of this value by renegotiating the mortgage amount, giving you a chance to turn equity into cash, which can be used for a variety of purposes. It also gives you a chance to borrow at a different and perhaps lower rate-of-interest.
Refinancing for Debt Consolidation
Having answered the question of what does refinancing a mortgage mean, let’s move on to some of the reasons people choose to take advantage of it.
It’s no secret that the average Canadian is carrying around a lot more unsecured debt than they might want to. Canadian household debt has been rising sharply, with the debt-to-income ratio reaching 175.4% in 2020.
A significant amount of that debt comes from an increased use in credit card spending — a trend that was already a problem before the pandemic hit, and which has only gone up since the coronavirus recession set in.
All this debt is a major concern, which is why many Canadian homeowners are turning to mortgage refinancing as a way of freeing up the funds to consolidate a number of high-interest loans into a single, lower-interest payment. Mortgage debt consolidation through refinancing essentially allows you slash the interest rates and roll a number of debts into a single monthly payment.
Securing Lower Monthly Payments
For homeowners struggling financially or who have found themselves suddenly out of work, it can be hard to figure out how to cover monthly payments.
For people in this position, it can make sense to contact mortgage brokerage offering alternative residential mortgages to explore mortgage refinancing options that will allow them to extend the period of the loan and secure lower monthly payments.
This makes the mortgage easier to pay off, and is an ideal option for people currently experiencing a period of under-employment of financial hardship. For those pursuing this option, alternative lenders are a better choice because they connect you with a greater range of lenders who can provide you with more choice.
Taking Advantage of Low Interest Rates
What is refinancing a mortgage if not an opportunity to renegotiate the interest you are currently paying? At today’s rock-bottom interest rates, it is easier than ever to replace your existing mortgage with one that charges a lower percentage.
This decreases the total amount you will spend in paying off the mortgage, and can be coupled with things like debt consolidation to reconfigure your current financial position.
When Should You Refinance Your Mortgage?
Between the pandemic, low interest rates, and rising house prices, there has never been a time when more people could benefit from refinancing — or a time when the gains from refinancing were clearer.
So, the answer to the question “what is mortgage refinancing and who is it for?” is that it is one of the best tools available to homeowners to free up cash, consolidate debt, and secure more manageable monthly payments. It is also perfect for homeowners who are feeling financial pressure or who want to take advantage of favourable economic conditions.
To learn more about how refinancing can help you improve your financial position, start your application with Burke Financial today!