Mortgage refinance is a process by which you get a new mortgage to replace your original one. The purpose of refinancing a mortgage is usually to get a better interest rate, but there are several other reasons you might consider a mortgage refinance as well.
In addition to getting a better interest rate, here are some other reasons to refinance a mortgage.
- Reduce monthly payments
- Take cash out of your home for large purchases
- To change from a variable to a fixed-rate mortgage
- To change mortgage companies
- To consolidate debt
How does Mortgage Refinance Work?
The start of the refinancing process is similar to the process of getting a mortgage. You look at different lenders and compare interest rates and other terms to see what the best deal is for you. Then you compare that offer with the terms of your existing loan.
Many times people will refinance because their credit score has improved since they got approved for their initial mortgage. The better your credit score, the easier it is to get loans at a lower rate, and a lower interest rate can save you money in the long-term.
Another way a mortgage refinance works is if you have equity in your house. Home equity refers to the market value of your house minus what you owe on the house. The equity of your home increases as you pay down your mortgage loan. It also increases as you make improvements to increase your property value or if the real estate market is doing well.
When you refinance to take equity out of your home, a house gets appraised, and the lender decides the percentage of the appraised value they are willing to loan you. You can borrow up to 80% of the appraised value of your home, but it’s up to the lender whether they will actually give you that much.
The balance of the initial mortgage then gets subtracted from that number, and what’s left is lent to the homeowner, and you can use that money to make a large purchase, or reduce credit card debt, or for something else that requires a large sum of money.
Ways of Refinancing Your Mortgage
There are three ways to get a mortgage refinance in Canada.
- Break your existing mortgage contract early-If you want to get a lower interest rate or access your home equity, you would consider breaking your mortgage contract. However, breaking a mortgage contract early will result in your lender charging a prepayment penalty.
- Add a home equity line of credit– By doing this, you will have access to your home equity at your discretion. You are responsible for interest-only payments on your outstanding balance.
- Blend or extend an existing mortgage-Your current mortgage lender may give you the option of a “blended rate” a blended rate is a combination of your current mortgage rate and the extra money you borrow at current market rates. A blended rate will be higher than competitive mortgage rates, so it’s a good idea to compare the blended rate to the savings if you break your mortgage.
If you are considering a mortgage refinance your mortgage, there are certain things you ought to consider. While mortgage refinance can result in a lower interest rate for you, it’s only beneficial to you in certain circumstances.
Any method of refinancing will incur legal costs, and if you choose to break an existing mortgage contract, you’ll have a prepayment penalty. Furthermore, you will need to pay home appraisal costs, title search fees, and title insurance fees.
You also need to consider how you are going to repay the loan and if you’ll still be able to afford to pay it back if interest rates go up.