Monday, 15 June 2015

8 Things You Need to Know Before Refinancing

Have you ever thought about refinancing you current mortgage? If you are like most homeowners, the answer is yes. While refinancing can come with many benefits, there are a few things to be aware of before diving right in.

Why Refinance?

There are quite a few reasons that you might consider a refinance, but by and far the most common are:

1) To negotiate a lower mortgage rate or better terms

- A refinance can be an opportunity to move on from that high-rate mortgage you've been feeling trapped in. It might also be a good chance to consider a lender with better prepayment privileges or less severe early payout penalties.

-If your goal is to lower your rate and save money in interest, then you must weigh the costs to break your current mortgage(See: IRD and 3 Months Interest Penalties), vs. the savings experienced. You should expect to see a break-even point in the near future based on the interest you will save each month. I've developed a spreadsheet to compare these options, please email me and I will be happy to create a comparison just for you.

2) To take out existing equity from your home


- Many people choose to refinance their mortgage as a way to access some of the equity built up in their homes over years of repayment. Common uses include home improvements(that reno you've been dreaming of!), travel(Whoo! Vacation time!), or extra cash for early retirement or to help fund your children's education. There are as many different ways to use this money as there are people, it is yours to do with as you see fit.

-With these options, you must consider the total cost of borrowing in order to have a true understanding of the cost to borrow the extra funds needed.

3) Debt Consolidation

- When mortgage rates are a tiny fraction of the cost of unsecured debts like credit cars, lines of credit, and personal loans, a mortgage refinance could be a way to consolidate some or all of your debt into one easy payment at a much better interest rate than you are currently paying on your consumer debts.

- Debt consolidation is a great chance to become debt free sooner or to lower your monthly obligations. Discuss your long and short-term goals and keep them in mind when choosing terms, amortizations, and monthly payments.

What Are The Options Then?

If you've decided that a renewal is something that you could benefit from, you should know that there are several different ways and times to access these funds. It's a good idea to consider all the options and to choose the one which best suits your intended purpose for the funds(See above).

1) At renewal time

- If your mortgage is coming up for renewal soon, it could well be worth the wait to refinance until your mortgage reaches maturity. The benefit is that you won't be paying any early payout penalty, potentially saving you thousands of dollars.

2) Early Renewal

- An early renewal could be in the cards for you if the savings of a new, lower interest rate outweigh the costs of breaking your term early, or if you need access to the funds before your mortgage matures. The penalties vary between the different financial institutions, but if you are unsure of your lender's policy please let me know and I'd be happy to give you all the details.

3) HELOC(Home Equity Line of Credit)

 - A HELOC is a line of credit which is secured against the equity in your home. The major advantage of a HELOC is that you can access funds up to your approved limit any time and only as you need it. You will have to make minimum payments on any balance you carry, but you will only pay interest on the amounts you actually use. This is great to have around for unexpected expenses, or to carry shorter-term debts.

- You may not even need to refinance to add a HELOC to your existing mortgage, many lenders will allow you to add this component to an existing mortgage if you are happy with the terms and rarte you currently have. See your mortgage specialist for details on whether this could be an option for you.

4) Blend & Increase

- In this case, your current lender will lend you additional funds at a new rate, while keeping your original mortgage amount at your old rate, effectively blending the 2 rates together somewhere in the middle. In most cases, a blended rate will be higher than current market rates so consider the costs vs. the savings of simply renewing into a new mortgage at a better rate.

- Many lenders will extend your mortgage term with this option. Depending on the prepayment terms, penalties, and other details of your mortgage, this can be a benefit or a drawback. Consider whether you are comfortable carrying on with those terms for an extended period of time.

5) Second Mortgages

- Second mortgages are often an option for those looking for some assistance with credit rebuilding and/or debt consolidation. It is best to look at this as a stepping stone in the direction of renewing or refinancing later at a better rate.

- Interest rates are higher on second mortgages because there is more risk on the lender's part when they are in second position. The trade-off comes in knowing that you can get an approval when you need it, and also in the fact that the rates are usually still significantly lower than consumer debt like credit cars and unsecured loans.

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