Mortgage General

A Beginner’s Guide to Refinancing

By January 24, 2023 February 3rd, 2023 No Comments

When you refinance your mortgage, you pay off your existing mortgage and swap it for a new one. Regardless of whether the mortgage is scheduled for renewal, if you wish to make significant changes to your mortgage agreements, mortgage refinancing is the way to go. While interest rates are mounting, Canadians are constantly seeking better mortgage loan refinancing deals. With so many possibilities and equity amassed in homes across Canada, now may be a great time to unleash your equity through mortgage refinancing.

Here’s an overview of how mortgage refinancing works!

  • Firstly, you need to approximate the value of your property.
  • Then compute 80% of the approximated value, because 80% is the conventional maximum mortgage amount on a property.
  • Know the outstanding amount on your current mortgage.
  • Deducting the amount payable on your current mortgage from the 80% worth of your home ( as initially, we need to pay out your existing mortgage).
  • The outcome refers to how much extra home equity you will have to operate with.
  • You can use the extra home equity to settle off bills, repair, invest, or accomplish whatever you want. You are not required to employ the entire amount of accessible equity.

Example of Mortgage Refinancing:

  • Assuming the value of your property is $500,000. Eighty percent of $500,000 is $400,000, thus this is the highest limit of mortgage one can normally borrow on the house. However, one could probably settle for much less.
  • Considering your existing mortgage balance is $2,00,000 at the moment.
  • We remove the OLD mortgage ($2,00,000) first from the Current mortgage (in this example, the maximum of $4,00,000): $4,00,000 – $2,00,000 = $2,00,000.
  • This $200,000 is the highest amount we have to deal with once your previous mortgage has been paid off.
  • The above $200,000 excess can be spent how you see best suited: If you owed $30,000 in debts, you could pay it off with the reduced refi rate and still be having $170,000 left over. You may then utilize the funds to upgrade your property, invest, or basically for anything of your wants and needs.

How much savings can I make if I refinance my mortgage?

The sum of money you might just save through refinancing your mortgage is determined by the type of arrangement you can establish with your lender. You could save a significant amount of dollars if you secure a reduced refinance interest rate over your present one. With a home refinance, homeowners can utilize home equity to settle out high-interest debt, while they can also employ cash-out refinancing for several other objectives.

While you’re working with a broker, request him\her for a mortgage assessment to aid in your mortgage refinancing approach. Their expertise on market rates plus mortgage calculations, together with their grasp of your financial conditions, will clarify if there is a positive benefit or not.

NOTE: Several lenders include the penalties with the new rate, while others do not. Stay cautious of it and confirm the criteria with your lender before entering into a refinance mortgage deal.

The Advantages of Refinancing Your Mortgage:

It is reducing your monthly payment by securing a lower rate of interest that might account for hundreds of dollars over the term.

Discharging your mortgage faster: You pay down your mortgage faster. When you transition from a 25-year mortgage to a 15-year mortgage, then you can pay it off sooner and pay less interest overall.

To make the transition out of an adjustable-rate mortgage (ARM) to a fixed-rate loan. This is a good idea if you believe interest rates may rise in the future or if you want a consistent monthly payment.

To make use of your home equity. Once you complete your initial mortgage, whatever money is left behind could be put towards home improvement projects, debt consolidation, or big expenditures such as college fees.

Expenses involved in Refinancing:

Mortgage refinancing fees include mortgage registration as well as legal fees since you’re replacing your existing mortgage with a new one. A house appraisal will also be required. Other charges are determined by how and when you go for refinancing. When you choose to refinance by shifting to a different lender a mortgage discharge fee will be payable. And when you refinance before the end of your term, then you will be vulnerable to mortgage prepayment penalties, based on the kind of mortgage. As a consequence for variable-rate closed mortgages, you will owe the lender three months of interest. And for closed fixed-rate mortgages, the consequence will either be three months of interest or an interest rate differential.

Additional important considerations while refinancing a mortgage:

Refinancing clearance is not assured, and the results aren’t always favourable. Obtaining additional financing necessitates a house reappraisal, a new title search, and other expenses (like legal fees and discharge fees). If the value of your property has dropped since you initially obtained a mortgage, you may not have sufficient equity to refinance.

The overall prospects of acceptance will rise if you can demonstrate to a lender that you possess a low debt-to-income ratio. To qualify for the lowest interest rates, you must have a total debt service (TDS) ratio of under 40 to 44 percent. – i.e., your mortgage payment, monthly property taxes, heating costs, and any current liabilities cannot exceed 40% of your documented monthly gross income. When you own just under 20% equity on your property, your mortgage would be labelled “high-ratio” and needs to be insured by the Canada Mortgage and Housing Corporation (CMHC) or a private insurer. An insured mortgage cannot be refinanced.

The Bottom Line

Refinancing could be a wise financial decision if it decreases overall mortgage payment, speeds up the duration of your mortgage, or allows you to develop equity faster. When utilized correctly, it could also be a useful tool to reduce debt. When you refinance, examine your financial position and question yourself: How long do I intend to stay in this house? How much money will I save if I refinance?

It’s also worth remembering that a sensible homeowner is continually seeking for methods to decrease debt, increase equity, save funds, and erase the mortgage payment. Withdrawing cash from your equity while you refinance will not assist you to reach any of those targets.

Although refinancing may appear to be intimidating at first, it could potentially save you a significant amount of money. Our team of professionals at Pegasus Mortgage Lending Center Inc. is happy to assist you in discovering the most affordable mortgage refinance rates across Canada. If you want to learn more about refinancing, click here for our complete guide on mortgage refinancing or reach out to us for a free consultation!