Mortgage Refinancing


Mortgage Refinancing

Refinancing means paying off an existing mortgage and replacing it with a new one. Possible reasons to refinance could be many in our context:

the opportunity to tap a home's equity to finance a large purchase; and the desire to consolidate debt. the opportunity to obtain a lower interest rate; the chance to shorten the term of their mortgage; the desire to convert from a variable rate mortgage to a fixed-rate mortgage, or vice versa;

Cost of refinancing is high and can vary between 3% to 6% of the principal amount. It, therefore, has its own downsides. Filing a Refinancing Application invariably involves the following:

Paying out the original mortgage; this has its own costs such as prepayment penalty, discharge fee and other costs stated in the fine print which most of us do not pay attention to when you are signing up for a new mortgage Cost of Appraisal Title search, other transfer charges (removing the old charge and putting a new charge on the property) and legal fee involved in the whole process both at the lenders and borrowers end are payable by the borrower. Application fees, Broker fee and Lender fee- these are significantly higher for Class B and private lenders and drive up the Annual Percentage Rate significantly

The borrower, therefore, must do the math and determine what are the benefits of refinancing under consideration.

Utilizing Equity and Consolidating Debt

While the reasons mentioned below to refinance are all financially sound, it is should be a route rarely taken as it may lead you to never-ending debt. Whereas if you have a sound plan to utilize your money for a more profitable venture or to consolidate high-interest debts it is justified.

A borrower must consider the Annual Percentage Rate of new money over the term of the mortgage and then decide to move forward with the Refinance. Refinancing by itself does not imbibe financial prudence and if the temptation persists and opium of easy money via refinancing route is all-consuming than it is a recipe for disaster. Consider the refinancing fee discussed above, a longer term of the mortgage, the return of debt once the credit cards get maxed out again.

Converting Between Variable Rate and Fixed-Rate Mortgages

Variable Rate mortgages offers were lucrative in 2015-2016 however, with consistent (five times since summer of 2017) raising of interest rates by Bank of Canada, it has brought down the lure for Variable Rate Mortgages considerably. The fixed rate mortgage to has hardened since the beginning of 2017. If the economic forecast suggests that rates are likely to move up further and it is envisaged the periodic increase will push the interest rates higher than existing fixed rate mortgage rates, it is ideal to convert to a fixed-rate mortgage. This results in a lower interest rate and eliminates concern over future interest-rate hikes. It is vice versa when the forecast exists for falling interest rates.

Securing a Lower Interest Rate

Reducing your interest rate not only helps you save money additionally it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 7% on a $100,000 home has a principal and interest payment of $658. That same loan at 4% reduces your payment to $475. In interest costs alone, it saves you $66,000.00 for the amortisation period and $15,000.00 for a five-year term.

Shortening the Loan's Term

In the falling interest rate regime, it is advisable for the homeowners to avail the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term.

Think Hard and Think Twice

Refinancing makes great sense and is prudent only if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it is a useful instrument in getting debt under control. Before you refinance, do your math well. It is a good idea to consult a friend who is good at numbers. Ask yourself, will you be able to imbibe financial prudence? It is also a great idea to have a careful look at your financial situation. You must ask pointed questions to the mortgage broker who is helping you get the refinancing:

how much is the APR? how much money you will be saving in the long-term? how much time it will take you to recoup the Refinancing cost?

If you are going to live in the house for a short term the cost of refinancing is very difficult to recoup. It is a short-term solution to your financial imprudence as it just buys you little time from an eventual financial disaster.

One must always aim for paying down the debt, increasing/building equity in the house and eliminating mortgage payments. When you refinance you move further away from the goal of reducing debt and it is rarely a good debt.