What Is Mortgage Refinancing, and How Does It Work?
If you own a home in Canada, chances are you have a mortgage. Approximately 30% of consumers in Canada had a housing loan as of the third quarter of 2022. While it may have seemed like a good deal when you took it out, circumstances and interest rates can change anytime. That's where mortgage refinancing comes in.
If you’re wondering, what is mortgage refinancing? This process allows homeowners to renegotiate their existing mortgage loan agreement, which can offer many benefits, such as consolidating debts, funding home renovations, or investing opportunities. With historically low interest rates, now is the right time to consider refinancing your mortgage before it gets too late.
In this post, we'll define mortgage refinancing, explain how it works, and discuss its benefits and drawbacks. So, let's dive into the world of mortgage refinancing and see how it can help you achieve your financial goals.
What Is Mortgage Refinancing?
Mortgage refinancing allows homeowners to swap their existing mortgage with a new one, often with better terms and interest rates.
From a Canadian perspective, mortgage refinancing can be a great way to save money on interest payments over the life of a mortgage. Homeowners may save tens of thousands of dollars over the course of their mortgage by refinancing at a lower interest rate.
Current Refinance Rates for May
The Bank of Canada's decision to hold rates steady for the second consecutive time on April 12, 2023, is expected to stabilize mortgage rates further. However, with inflation growth slowing down, the bank has indicated that it will maintain rates throughout 2023. As a result, variable mortgage rates are likely to remain stable, with a possibility of declining in 2024 if economic conditions hold steady.
When comparing mortgage rates, consider not just the rates themselves but also any prepayment penalties or risks associated with them. At the same time, shorter-term fixed-rate mortgages may be suitable only for short-term borrowing needs.
Types of Mortgage Refinancing
Various refinancing programs are available to homeowners who want to lower their monthly payments. Each type of refinancing has pros and cons that may align with your unique financial goals and circumstances.
A rate and term refinance involves replacing your current mortgage with a new loan with different terms. The terms could include a new interest rate, monthly payment, and loan length. The vast majority of borrowers with conventional, FHA, or VA mortgages choose to refinance their loans in this way.
A cash-out refinance allows you to take out a much more substantial loan amount than what you currently owe on your home and receive the surplus cash. This type of refinancing is a good option if you've built equity in your home. Most lenders won't let you take out more than 80% of your property appraisal in cash, so you'll keep at least 20% equity in your home. Conventional, FHA, and VA mortgages are eligible for cash-out refinancing but not USDA mortgages.
A streamlined refinance is a simplified refinancing process in which an appraisal or credit check may not be necessary. Streamline refinancing is only available for government-backed loans such as FHA, or VA. It's a good option to lower your interest rate or monthly payments without going through a lengthy refinancing process.
Home Equity Line of Credit
Borrowing against the value of your house is possible with a home equity line of credit (HELOC), which functions like a credit card. However, the interest rates are much lower because it's a secured loan.
How Does Mortgage Refinancing Work?
If you want an answer on how mortgage refinancing works, it is a popular option for homeowners. It lets them pay off their previous mortgage by securing a new loan with different terms and interest rates.
Refinancing allows borrowers to receive a loan amounting to as much as 80% of the appraised value of their home, which means lenders permit them to pay for the refinanced mortgage over an extended period.
Accurate income verification is also an important part of refinancing mortgages that helps ensure fair and responsible lending practices while reducing the risk of fraud and default for lenders, landlords, and government organizations.
If you decide to pursue refinancing, approach lenders directly or work with a mortgage professional and refinance calculator to assist you in submitting your application with all the required documentation.
How To Find The Best Refinance Rate?
Mortgage refinancing is a viable option for homeowners to adjust their mortgage terms and interest rates. To find the best refinance rate, evaluate your current mortgage terms and payment history and analyze them with market trends.
Research and compare rates from at least three different lenders (TD Bank, BMO, National Bank of Canada), including other refinance options like second mortgages or home equity lines of credit. Improving your credit score can also help you qualify for lower rates.
Finally, don't hesitate to negotiate with your preferred lender to request lower rates or waived refinance fees and lower loan-to-value ratio based on your creditworthiness, payment history, or loyalty.
Best Savings Accounts for May
If you’re looking to find the best rates for refinance in Canada, it’s best to browse through the best savings accounts available. Here are some top-rated accounts for May 2023:
EQ Bank Savings Plus Account
The EQ Bank Savings Plus Account offers a high-interest rate of 1.50%, with no minimum balance requirement or monthly fees. The account also provides free electronic fund transfers, unlimited transactions, and mobile banking features.
Simplii Financial High-Interest Savings Account
The Simplii Financial High-Interest Savings Account offers a variable interest rate of up to 0.90%, with no monthly fees or minimum balance requirements. The account also provides free electronic fund transfers and unlimited deposits and withdrawals.
Scotiabank Momentum PLUS Savings Account
The Scotiabank Momentum PLUS Savings Account offers multiple interest rate tiers of up to 1.75%, with no monthly fees or minimum balance requirements. The account also provides bonus interest rates based on your savings period and deposit frequency.
Refinancing can be a savvy financial move if done for the right reasons. It's not just about getting a lower interest rate, though it can help. Here are some other compelling reasons why you should consider refinancing your mortgage.
One of the most common reasons Canadians refinance their mortgage is to take advantage of lower interest rates. Be aware that there may be fees associated with canceling your mortgage insurance, regardless of whether you have a fixed-rate or adjustable-rate mortgage.
Depending on your lender and the equity you have in your home, you can borrow up to 80% of your home's value through a refinance. Homeowners who wish to take advantage of current low loan rates and make some significant investments may find this a viable alternative.
Many Canadians carry high-interest debt, such as credit card balances. Refinancing your mortgage can be a smart way to consolidate your debt into one manageable monthly payment with a lower interest rate.
Refinancing your mortgage can provide you with the funds you need to make those improvements. Whether you want to add a new bathroom, renovate your kitchen, or build a deck, refinancing can help you achieve your home improvement goals.
Refinancing your mortgage can also give you the funds to invest in other properties or businesses. Accessing your home equity through a refinance can unlock new investment opportunities and grow your wealth over time.
Pros and Cons of Refinancing a Mortgage
Refinancing your mortgage can have both advantages and disadvantages. One of the biggest benefits is locking in a lower interest rate, which can save you money on interest payments over the life of your loan.
Refinancing can also help you pay off your mortgage sooner or lower your monthly payments to free up extra cash. Additionally, if you have equity in your home, you can use a cash-out refinance to convert it into cash for various financial goals.
Final Word on Mortgage Refinancing
Mortgage refinancing can help lower interest rates, pay off mortgages sooner, and provide access to cash through home equity. However, it's essential to consider the potential drawbacks, such as closing costs and increased monthly payments or loan terms.
Consulting with a mortgage loan officer can provide valuable guidance on whether refinancing is right. With careful consideration, homeowners can use refinancing to achieve their financial objectives and secure their long-term financial future.
Mortgage refinancing can be an excellent financial move for homeowners who want to save money on their monthly payments or shorten their loan terms. Borrowers may save tens of thousands of dollars over the course of their loan by switching to a new mortgage with a lower interest rate.
If you’re still wondering what mortgage refinancing is and how mortgage refinancing work, Quick Funding is here to assist you in your search for the most suitable loan terms and conditions while you pursue a refinancing.
