Owning a home allows you to build credit, grow equity and invest in your future. Whether you are shopping for your very first home or you’re a long-time homeowner, it’s important to understand how to navigate the mortgage process, especially when it comes to refinancing a mortgage.
When you first apply for your mortgage loan, especially if you have never applied for one before, you may get interest and finance terms that are less than ideal. The good news is that you don’t have to endure the terms of your mortgage loan forever. Refinancing a mortgage may allow you to secure a much more favorable loan term and interest rate, which can make a significant difference when it comes to your long-term financial picture.
By refinancing a mortgage, you effectively pay off the full amount of your mortgage and take out an entirely new loan. Because the second loan pays off the original, you can establish a new loan term and interest rate. There are many different reasons why homeowners might choose to refinance, and it can be an overwhelmingly beneficial choice for many.
Why refinance your mortgage?
Below are some of the most common benefits homeowners realize when they refinance their mortgage in Canada:
- Lower interest rates: One of the primary reasons why people choose to refinance is due to dipping interest rates. Even though you will have to pay some fees and penalties for breaking your current mortgage contract, the long-term savings you’ll realize with a lower rate may very well outweigh the initial cost.
- Lock in an interest rate: Amidst a backdrop of rising rates, many Canadians are choosing to refinance their mortgage in order to lock in a longer term rate in anticipation of higher future rates.
- Debt consolidation: If you have several different loans with varying payments and interest rates, you may be struggling to keep up. Refinancing a mortgage gives you the ability to consolidate your big payments and debts into one long-term loan. This allows you to have a single interest rate, which is much more manageable than having separate terms for auto loans, credit card debts and other lines of credit.
- Home equity access: As you pay off your mortgage, you build equity in your home. You can calculate your equity simply by subtracting the amount you have left to pay off your mortgage from the total market price of your home. By refinancing a mortgage, you can tap into this equity, using it to renovate or upgrade, make investments or pay for education for you or your children.
Step-by-step to refinancing a mortgage
If you’re feeling daunted by the mortgage refinancing process, know that you are not alone. Many homeowners find refinancing to be challenging at first. Fortunately, you can follow a few simple steps to refinance your home, and you can always ask a mortgage professional for help along the way.
- Evaluate the market: The most important step you can take if you wish to refinance is to evaluate your mortgage on an annual basis as it relates to the market rates in your area. Refinancing a mortgage is only beneficial under the right circumstances, so make sure the timing is right before starting the process. Mortgage professionals familiar with your market are available to help you along the way.
- Begin your application: Just like with getting a first-time mortgage, you will need to begin the refinance process by applying for a mortgage loan. You will likely work directly with a mortgage professional who can help compile the necessary information and submit your application for review.
- Research loan types: The type of mortgage loan you get depends on your specific financial situation and the goals you aim to achieve by refinancing a mortgage. There are fixed-rate mortgages, through which your interest rate and monthly payments are consistent throughout your loan term, and adjustable rate mortgages, in which your payments and interest rate may fluctuate. There’s also a combination rate mortgage, which may include both fixed and adjustable interest rates. Carefully consider each option before moving forward.
- Gather relevant documentation: You will need to make sure that all of your documentation is in order before getting started. You can ask for a list of documents that you will need to submit for your specific loan application. These usually include pay stubs and tax documents.
- Be prepared: Even if the climate of the market seems to be perfect for refinancing, the process might not be as easy or favorable than you are expecting. Make sure that you consider the fees and costs you might have to pay during the refinance process to determine whether you are actually getting a good deal. To help ensure you’ll truly save money, it’s a good idea to secure an interest rate decrease of at least a half-percent to account for additional fees.
If you are considering refinancing a mortgage, the best thing you can do is invest plenty of time into researching the market, crunching the numbers, and evaluating the potential advantages and disadvantages. You can also get more information about whether refinancing your mortgage is the right choice for you and what the process will look like by speaking with a skilled mortgage professional