For the majority of homeowners refinancing their mortgage is something that they will have to strongly consider – if not do – at some point during their mortgage term. The Canadian Mortgage and Housing Corporation, also known as the CMHC define mortgage refinancing as a kind of financing that allows homeowners to pay back their mortgage in full by securing another loan. This new loan then comes with its own terms and interest rate, separate from the original.
By doing this, borrowers can receive a loan that amounts to as much as 80% of the appraised value of their property. Lenders allow these homeowners to then pay for the refinanced mortgage over an extended period of time.
There are a multitude of reasons as to why a homeowner would refinance, and several advantages that go along with it – especially if done right. However, there are also things that ought to be kept in mind and steps that have to be taken before you can access your property’s equity and secure another loan with better terms.
Step 1: Figure Out Whether You Actually Have to Apply for a Loan
Opting to refinance your mortgage is an important and long-term commitment. Because of this, it is important to approach the lender understanding your actual reason for refinancing your home. Some valid reasons for refinancing your mortgage might include:
- Interest rates have lowered to the point that refinancing your home can actually lower your borrowing costs.
- You want to renovate your house.
- You need money for your child’s education.
- You want to invest in a new business venture.
- You are considering purchasing a new property.
- You want to refinance your home to consolidate your debts.
Step 2: Evaluate if Refinancing Mortgage is Your Best Option
Refinancing your mortgage can lower your interest rates but it is important to note that this kind of agreement is only advantageous to the borrower if the circumstances are correct. Therefore, you must research what the current value of your property as well as the real estate market rates in your area.
Step 3: Figure Out if You Can Afford It
Making the decision to refinance your mortgage the amount that you are able to do directly correlates to the amount of equity that you have in your home. According to the Financial Consumer Agency of Canada, home equity is the difference between the balance of your remaining mortgage subtracted from the current value of your property.
Step 4: Explore Your Options
Once you have established that you are in a financially acceptable position to refinance your property it is time to find the best option for you. Some options that you might consider are:
- A home equity line of credit
- A second mortgage
- A line of credit
- A reverse mortgage
When exploring your options it is important that you are aware of the fact that it is not only the kind of loan that you have to be aware of but the conditions of it. What kind of interest will you be dealing with? Will it be different than what you originally had? Can you keep it the same?
- A combined or hybrid model
- A fixed rate mortgage
- A variable rate mortgage
Step 5: Submitting Your Loan Application
Now that you have done all of the prep work it is time to submit your application. Now, if you plan on doing this all on your own, you are going to need to approach the banks and lenders yourself and ask them for a list of documents that must be submitted along with your application. These lenders generally require that you present your proof of income and tax documents.
Step 6: Reviewing the Terms
At this point, the bank or private lender has taken the time and evaluated your application and found you qualified enough to secure a refinancing mortgage loan. This is also the point where some people assume that they have already been approved, however, this is not the case. Just because they accepted your application does not mean that you must automatically agree to their conditions.
Once you hear back from your lender it is vital that you read through the terms that they set carefully and pay particular attention to the provisions about interest rates and other costs. Ask the lender for clarification if there’s anything indicated on the contract which you don’t fully understand.
It can be challenging to figure out whether the situation is optimal for you to refinance. If you feel like you might need assistance in sorting out whether refinancing is the right option for you, speak with a mortgage professional today.