5 Things to Consider Before Refinancing Your Mortgage
Updated: Mar 21, 2021
Mortgage Refinancing
Mortgage refinancing in Canada is a well-use tool consolidate your debts and improve your financial situation. You can have reduced monthly payments and a lowered interest rate. Moreover, you can access additional cash for urgent need or something you have always wanted. Fact is that covid-19 has hit many with financial crisis and mortgage refinancing is a viable option for millions to help solve (or at least improve) your financial stresses. However, before refinancing, there are some important things with need consideration.
5 Things to Consider Before Refinancing Your Mortgage
Your Current Equity
Another thing you have to look at is your home's equity value, and there are two significant factors related to your equity's value. These two items combined result in your total home equity.
How much amount you have already paid related to existing mortgage(s).
The increase or appreciation in value/percentage in your equity/home
Also, when refinancing your mortgage keep in mind; The amount of loan cannot exceed 80 percent of your equity’s value (appraised value) MINUS the outstanding/remaining amount of your previous mortgage(s).
Current Interest Rates
The interest rate is one of the most critical elements for refinancing in Canada. Lower interest rate always attract interest toward refinancing and which is understandable. Afterall a one percent decrease in interest rate can save you hundreds monthly and tens of thousands over the life of your mortgage. Do keep in mind however that not everyone will qualify for the best available rates. Lenders will post their best available mortgage rates, however borrowers still need to apply and be approved. Mortgage brokers or agents in Canada are your best resource when looking to secure the lowest rate and best mortgage product for your unique situation.
Your Debt Serving Ratio and Credit Score
Mortgage refinancing is basically replacing your current loan with a new loan. Lenders will always feel uncomfortable if they think their money is at high risk. Your TDS (total debt service) and GDS (gross debt service) are important factors for a lender to approve or reject your application.
These ratios are a deciding factor in mortgage refinancing and for that, keep your GDS below 32 percent and TDS below 40 percent. If these figures increase, your chances of refinancing will shrink, and you will most likely qualify for small loans. The best option is to contact a mortgage broker who has special software dedicated to calculating these numbers for you.
The Cost of Refinancing
Mortgage refinancing may look like an attractive option, but there are some costs you may have to pay when refinancing your mortgage. If applicable, here are some expenses you may have to bear while refinancing your mortgage:
Closing cost: You will have to pay closing cost either the mortgage is closed through a lawyer or the lender's in-house refinance program.
Appraisal fees are commonly required step in the refinancing process. Essentially this tells you and your new lender what the properties true current value is.
Penalty for breaking the previous mortgage. Generally, it includes either three months' interest Or a calculation called “the interest rate differential”.
The interest rate differential is calculated differently depending on your mortgage lender, but essentially it is the amount of $ the lender will lose if they were to re-lend the money you will no longer be borrowing. Mortgage brokers are experts at calculating these amounts, however the best option is to speak with your lender.
Choosing the Best Mortgage for your situation
Mortgage refinancing means that you will have a new set of policies to follow and often a new lender so choosing what mortgage to sign far more than an interest rate. When done correctly, carful consideration often means a better overall financial situation for you and your family. A few of the options your mortgage broker will discuss with you when choosing a mortgage include.
Amortization, how long do you want to plan to repay your mortgage
Variable interest rate vs fixed interest rate
Prepayment options which allow you to pay off your mortgage faster.
Penalties you will incur if you need to break the mortgage
Mortgage insurance which is available only on some types of mortgages and mandatory on others.
Plus a number of other financial considerations most folks do not consider.
Bottom Line
These are five important factors you should consider while mortgage refinancing. Yes, some of them may simple, however with any transaction which includes 20+ pages of fine print, the devil (or benefits) are in the details. Refinancing has some amazing benefits and can be an incredibly useful financial tool for many people in many situations.
One of the more attractive reasons to refinance your mortgage is todays interest rates which are at historic lows. Mortgage refinancing in the current situation would mean you will have possibly the lowest interest rate to enjoy for a number of years.
Consolidate your debts with mortgage refinancing. If you are paying higher interest rates on your personal loans or credit cards, then refinancing your mortgage is a good option to cover those expenses.
If you need money for your education, medical expenses, or even for your home's renovation, mortgage refinancing is a handy option, especially with the lowest interest rates nowadays.
Take that long desired trip of a lifetime. While taking on debt for frivolous spending needs to be carefully considered, mortgage refinancing can be an excellent tool if it makes sense in your situation.
Doug Paterson
Mortgage Agent in Ontario, Canada.
Dominion Lending Centres.
416.432.8836 | www.dougpaterson.com
