A Simple Guide to Mortgage Refinancing
Curious about mortgage refinancing? You’ve come to the right place! Our guide to mortgage refinancing will help you understand what mortgage financing is, how it can help you save money, and what your options are. By the end of this article, you’ll also find out if you’re eligible for refinancing, when the best time to apply is, and how long the process takes.
Seasons, politicians, fashion trends, relationships, and what you feel like having for dinner tonight. These things all change — and so too can your mortgage. That’s right! There is more than one type of mortgage out there, and just because you signed something agreeing to certain terms for a certain amount of time doesn’t mean you are stuck with what you’ve got. Your mortgage can be changed to your benefit, whether that’s to free up capital for an income property, consolidate debts, or just lower your interest payments. When you go to change the terms of your mortgage – for any reason – this is called refinancing, or mortgage refinancing.
What is Mortgage Refinancing?
Wondering what brokers mean when they refer to “refinancing? Let’s start with the basics: When you finance something, such as a house or a car, you are borrowing money from the bank to help pay for what you want in full. Instead of agreeing to pay back the person who sold you your stuff, you’re agreeing to pay back a bank instead. (Yep, we’re starting off THAT basic!)
So, when you “re” finance something, you’re “re” doing or “re” placing your original financing agreement (in this case, the mortgage you received from the bank) with a new agreement and new terms. Other common loans people refinance are car loans, student loans, and other types of debt obligations.
After the refinancing process, you’re essentially starting over with new terms. To make sure you benefit as much as possible during the refinancing profess, it can be helpful to consult with a mortgage broker who can help guide you through everything and find you the best new terms to suit your situation.
To summarize, when you choose to refinance your mortgage, you are either revising, redoing, or replacing your existing mortgage with something that has new and different terms that suit your current needs and help you meet your financial goals. You are saying good-bye to your existing mortgage as you know it, and either opening a brand new one, or tacking onto your existing mortgage (borrowing more money).
Who is Eligible for Mortgage Refinancing?
If you’re currently paying down a mortgage, depending on things like how big your down payment was and whether or not your home has gone up in value, it is highly likely that you can qualify for mortgage refinancing – even if you have incurred additional debt after getting your initial mortgage. In fact, many homeowners who choose to refinance are looking to consolidate such debt to make everything more manageable. Finding out if you’re eligible for refinancing often starts with a quick chat with one of our mortgage brokers. Note that having excellent credit will increase the likelihood of you qualifying for a lower interest rate, but good credit is not necessarily required in order to refinance.
There are several reasons why homeowners choose to refinance their homes. People who are interested in refinancing their mortgage are usually looking to achieve one or more of the following goals:
- Access their home equity in order to purchase an investment property
- Access their home equity in order to consolidate their debt
- Revise their current interest rate to something lower
- Revise their current payment schedule to lower their overall debt payments
Advantages of Refinancing
There are four main advantages to breaking up with your current mortgage and starting over with a new one. Depending on your goals and the type of refinancing route you take, the main advantages of refinancing are:
- Access your home equity – After you make enough payments on your mortgage, you build equity in your home, provided home values have remained stable or went up. Refinancing allows you to access your home equity – most often by either getting a home equity line of credit (HELOC) or blending and extending your mortgage with your current lender. Common reasons to tap into your home equity include renovations, investing in more property, family vacations, early retirements, and college tuition.
- Consolidate debts – Sometimes refinancing can free up some of your money to help you pay off higher interest loans like credit card debt. With this type of refinancing, you’re simply taking out a larger mortgage. This type of refinancing requires you to have at least 20% equity in your home.
- Lower interest rates – If lower interest rates are your mortgage refinancing motivator, you save money over time, pay off your mortgage faster, and lower your monthly payments. Refinancing for lower interest rates is sometimes referred to by lenders as rate-and-term refinancing.
- Change your terms – Sometimes your needs change. Refinancing gives you the flexibility to find a mortgage that better suits your changing financial situation. For example, you can switch from an open mortgage with higher interest rates but fewer prepayment penalties, if any, to a fixed-rate mortgage, which locks in lower rates but doesn’t allow you to prepay much.
“Home equity is the market value of your property, minus the outstanding balance of your mortgage and any other debts secured by your property.”
What You Should Know Before Refinancing Your Mortgage
While mortgage refinancing comes with a host of benefits and there are many reasons why people choose to go this route, there are some things to take note of before beginning the process, such as:
#1 Refinancing begins by finding out the value of your property
Having a general idea what your home is worth is suggested before refinancing is considered. Review your BC Assessment notice as a starting point, and check out what similar houses are listed for in your area to determine if your home has gone up in value since you bought it.
A mortgage broker can be instrumental in getting things started for you by simply making a call to your lender on your behalf and inquiring about your home’s value. Some lenders use an automated system and can see right away if your home has gone up in value or not. If the lender’s automated assessed value is high enough, an on-site formal appraisal might not even be required.
If a formal appraisal is required, there are fees associated with having this done (more on this is covered in step 3).
#2 You’ll need to be approved (re-qualify) for your new mortgage
As mentioned above, in order to refinance your mortgage, you need to qualify for the new terms – just like you had to qualify for your existing mortgage.
For example, if it is determined that you have enough equity built up in your home, you can borrow up to 80% of the value of your home.
If your loan-to-value ratio looks good, the lender will be looking at additional qualifiers, such as your:
- Credit score,
- Current income,
- Current assets and investments, and
- Current debts
#3 There can be fees associated with refinancing your mortgage
The cost of refinancing your mortgage will vary slightly, based on the strategy you decide to use to access your home’s equity or lower your interest rate. In general, you can expect to pay:
- Any applicable prepayment penalties for breaking your current mortgage early,
- Appraiser fees ( if required), and
- Legal fees to change the financing on title.
One of our mortgage brokers can help guide you through the mortgage refinancing process so you end up paying as few fees as possible. We want to make sure refinancing will only help you get ahead when it comes to your financial future.
When Should I Refinance My Mortgage?
The absolute best time to refinance is when you actually need the extra money that refinancing can free up for you, to put towards higher interest loans or purchase an income property, for example. Because of the costs involved, refinancing your mortgage should only be considered when doing so will save you more than the penalties and fees associated with refinancing. Not sure if this is the case for you? Talk to one of our mortgage brokers to find out what your options are and get a full understanding of your money-saving potential. There is no harm in asking around about your options. Again, the benefits of refinancing can often outweigh the fees you’ll pay. For an excellent example of this, check out our Case Study on James and Jessica, who refinanced recently to purchase a rental property.
Refinancing also makes sense when interest rates are low and stable. It’s also a strong option during a hot market when home values are on the rise – just remember that the savings potential from lower interest rates aren’t felt overnight and take time to build up.
Refinancing might also be extremely beneficial for you if your credit score has improved drastically since you first got your mortgage, you may qualify for a lower interest rate. In this situation, the reduced interest rate can be worth the associated fees.
One of our mortgage brokers can help you determine which option is best for you and whether or not the timing makes sense.
Refinancing can be done at any time of the year. The entire process takes about 2-4 weeks.
Ready to learn more about your mortgage refinancing options in Victoria, BC? Contact Olympic Mortgages today to get started and chat with one of our accomplished local Victoria Mortgage Brokers.