You’ve probably heard the term “mortgage refinancing” tossed around like salad, but do you truly understand what it means? Mortgage refinancing is when you replace your existing mortgage on your property with a new mortgage with different terms.
It’s easy to confuse mortgage refinancing with a second mortgage. Although they’re both similar, they’re different mortgage products. A second mortgage is when you request additional mortgage funds outside your first mortgage and doesn’t replace it. Mortgage refinancing provides you with additional funds and is used to replace (pay off) your existing mortgage. The new mortgage oftentimes comes with better terms.
Before refinancing your mortgage, it’s important to understand that you must pass the mortgage stress test. If you qualified for a mortgage before the stress test came into effect, there’s a possibility that you might not pass the stress test now. You’ll want to speak with a mortgage broker to see if that could be an issue for you before breaking your mortgage with your current lender.
Now that you have a basic understanding of mortgage refinancing, three tactics to a successful mortgage refinancing in Canada.
Consolidating and paying off debt
Do you have a lot of high-interest debt? Credit card debt can easily carry interest rates upwards of 30 percent. Ouch! Why not roll that debt into your mortgage and pay a substantially lower interest rate?
Mortgage debt is one of the cheapest forms of debt out there. You could save yourself thousands in interest and reach debt freedom sooner.
When you consolidate your debt, you take out a new mortgage and roll your existing debts into that mortgage. Before refinancing your mortgage, you’ll want to make sure it makes sense. If you signed up for a mortgage a while ago, the mortgage rate you’ll pay on a refinance is most likely higher than your existing mortgage rate, but if you’ll save money overall by consolidating your other debts, it may be worth it. Speak with a mortgage broker and get him to crunch the numbers and show you it makes sense.
Another advantage is convenience. Instead of having several monthly payments to worry about, you’ll only have one, your mortgage.
Just make sure you’re financially disciplined. There’s no point in refinancing your mortgage if you’re going to find yourself in the same financial situation (in debt) a few months later. You’ll want to come up with a repayment plan and stick to it, otherwise you may be no further ahead in a year’s time.
Home equity line of credit
Are you looking to access the equity that you’ve built up in your home? Then a home equity line of credit is worth considering. With a home equity line of credit, you can access a percentage of your home’s value (provided that your existing mortgage and home equity line of credit don’t exceed 80 percent of your home’s value).
A home equity line of credit operates a lot like an unsecured line of credit except it comes with a lower interest rate and is secured against your home. The lower interest rate is because it’s secured by the equity that you’ve built up in your home over the months and years.
To access the equity in your home, you typically need a collateral mortgage. This is a mortgage where a charge is registered on title for an amount greater than the value of your property. If you don’t have a collateral mortgage, you’ll likely need to refinance your mortgage and choose a lender that offers one.
With a home equity line of credit, you can use the funds as you see fit. Common uses include renovating your home, going back to school and buying a rental property.
Taking advantage of lower mortgage rates
If you have a mortgage with a higher rate when you signed up, you might want to consider refinancing your mortgage if mortgage rates are lower today. However, before you do that, it’s important to make sure you understand if you’ll actually save money.
When you refinance your mortgage, you may face a mortgage penalty by breaking your mortgage with your existing lender. Some lenders may cover that or let you roll that into your new mortgage, so be sure to speak with a mortgage broker and assess all your options.
Mortgage refinancing can be complicated. That’s why it’s important to work with a trusted unbiased mortgage broker to ensure you get the best advice possible. Get your mortgage broker to crunch the numbers and show you that you’ll actually save money by refinancing your mortgage if that’s your main goal.
