What not to do when refinancing a mortgage in Canada
11 June, 2018 / by Glenn Carter
Refinancing a mortgages is an option many homeowners in Canada consider for various reasons. Some do so to reduce their interest rate and monthly mortgage payments. Others consider it to be the best method to consolidate all their debts.
Some find it to be their only way to way to get enough funding to renovate the house, start a business, or pay for their children’s tuition.
There are certainly great financial benefits to mortgage refinancing when done correctly and at the right time. However, should you make a miscalculation or commit a mistake,refinancing your home may be less advantageous for you than it would have been had you prevented those little missteps in the first place.
Or worse, you may find yourself in a more awkward financial situation than before.
So that you’ll be able to avoid committing such errors, here are six things you should not do when refinancing a mortgage in Canada.
1. Refinancing at the wrong time
You should only refinance the mortgage of your home when there is something to gain from doing so. For example, if the interest rate of your refinanced mortgage will be higher than the rate of your current mortgage, then you stand to lose more than you’ll get in the long run.
It’s also inadvisable to refinance when you have less than 20% equity of your property, or you presently have a bruised credit. Before you approach a lender, you must strive to raise your credit score.
You may do this by reviewing your credit report and making necessary changes (if any), updating your current bills, and paying off some of your debt. Senior VP at CIBCadvises that borrowersstart doing their homework up tosix months in advance of their renewal date.
2. Failing to shop around to find the best deal
When it comes to refinancing or getting any kind of mortgage for that matter, you should take the time to explore your options. Don’t commit to your current lender or accept the first deal that falls on your lap.
If you don’t make an effort to shop around until you find the one that suits you best, you might lose the opportunity to save a significant amount of money. Don’t limit your choices to big banks either. With the help of a mortgage broker, you can get introduced to dozens of lenders who may be more inclined to accommodate those with a less-than-stellar credit score or whose income is earned from less-than-conventional means.
3. Neglecting to do a background check on your lender
In the world of real estate and mortgages, there are deals that may seem “too good to be true,” and that’s because they usually are. Unfortunately, there are unscrupulous entities that still take advantage of people in this manner, and, therefore, it is up to homeowners and borrowers to exercise vigilance.
It’s not wise to transact with a lender just because they offer the lowest rate. However, having a grain of doubt doesn’t mean you should walk away from a potentially great deal either. This is why it’s so important to work with a trained mortgage professional.
Before you agree to close any agreement with a particular lender, you should thoroughly evaluate the terms of the mortgage being offered to you and verify the legitimacy of the lending institution involved.
4. Choosing “no-cost” financing
While shopping around for the right mortgage refinancing deal, you might encounter lenders who might offer “no-cost” financing. This means you will no longer have to pay your closing costs upfront.
However, just because they advertise their financing services as “no-cost” doesn’t mean refinancing your mortgage with a particular lending institution is completely free. You may not have to pay for your closing costs now, but they’ll add it to the loan amount and may even potentially raise the interest rate of your refinanced mortgage.
In these cases, it may be best for you to pay for your closing costs now to avoid paying more later on.
5. Not locking down your interest rate right away
Interest rates in the mortgage market are always changing. It might be lower today then higher in the next, and vice versa. Therefore, it is recommended that you lock in the rate of your refinanced loan as soon as possible.
Once you have done so, the interest rate on your mortgage will no longer be at the mercy of fluctuating market rates while the loan application is still being processed. Doing this potentially saves you a lot of money in the long run.
Many economists expect the Bank of Canada’s interest rate to continue climbing in the latter half of 2018. Ensure you’re not holding out for the absolute best rate otherwise you may just end up getting caught on the wrong side of the interest rate curve.
6. Not taking the time to read and comprehend the terms of your refinancing agreement
Signing a document without reading it first is as good as consciously asking for trouble. Any piece of paper you sign in relation to your mortgage refinancing application is a legal document which you must presume is enforceable.
Therefore, you must take as much time as you need to read the fine print of your loan agreement. Pay particular attention to the clauses which discuss pertinent details like interest rate, amortization period, mortgage term, prepayment options, penalties, and more.
If anything is unclear, do not hesitate to ask your lender or broker questions. If possible, evaluate the terms and conditions of your new loan agreement with a mortgage professional. They will help explain anything you don’t fully comprehend about your loan documents. A mortgage broker can also negotiate on your behalf to help make the deal more advantageous.
As previously mentioned, mortgage refinancing can be a smart financial decision if executed properly and at the most opportune time. According to CIBC estimates, some 47% of existing mortgages will be up for refinancing in 2018 compared to an average of 25-35% in a typical year.
This is partly due to the recent regulatory changes in the mortgage financing industry installed by the government. Moreover, refraining from committing any of the mistakes listed above will certainly help ensure that you get the best refinancing terms for you and save you a lot of money in the process.