Many Canadians use refinancing to consolidate their debt in order to take advantage of cheaper interest rates and minimise the number and amount of payments they make each month.
Refinancing a mortgage allows homeowners to pay off their old mortgage in full by getting a new loan. This new loan may free up some cash for large projects such as house improvements or post-secondary education for the children.
Refinancing is an excellent choice for many homeowners, but there are numerous aspects to consider before proceeding. Continue to read for a list of five things to think about before refinancing.
You are technically applying for a new loan when you refinance your current mortgage. That means your application may be refused if the lender believes you are a danger.
It's a good idea to check your credit score before applying. If your credit score has dropped, you may not be able to obtain the best rates.
When lenders review your mortgage application, they look at your debt service ratios as well —specifically, the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios.
The GDS ratio calculates how much of your gross income is required to cover your monthly housing expenditures (mortgage, property tax, heating bill and condominium fees if applicable).
The TDS ratio is the percentage of your gross income required to settle your debts. It covers the previously stated housing expenditures as well as other monthly debts such as student loan repayments, line of credit and credit card payments, and any auto loans you may have.
Both of these ratios significantly impact how much money a lender is prepared to offer you. If you have high ratios, you will most likely be accepted for a smaller loan.
Closing fees must be paid before your refinancing can be completed, just as they must be paid when you take out a mortgage loan. The actual closing charges you'll pay may vary depending on where you reside, but here are some common fees to look out for:
Application fee: When you make a request for refinancing, your lender may charge you an application fee. Whether you are authorized to refinance your loan or not, you must pay this charge.
Appraisal fee: Before you may refinance, your lender will demand an appraisal. Appraisals show the lender that the value of your home has not decreased since you purchased it, and that they are not lending you more money than it is worth.
Inspection fee: Some regions need a specific check (such as a pest inspection) before a refinancing may be completed. Before you qualify for some types of government loans, you may need to undergo an inspection.
If you refinance with a new lender that didn't service your previous loan, you may be required to pay for a new title search. You may also be required to pay for title insurance again, which protects you and your lender from additional claims against the property.
Closing fees typically range between 3% to 6% of the purchase price. Before you apply for refinancing, make sure you can afford these charges.
Depending on the prepayment penalty and the size of your existing mortgage, refinancing to achieve a lower interest rate can save you a lot of money over time. Expect to pay a three-month interest penalty if you have a variable-rate mortgage. The greater of three months interest or the interest rate differential penalty if you have a fixed-rate mortgage (IRD). Don't be put off by fines; knowing the figures can help determine if refinancing would save you money.
You don't have to refinance with the same lender you used for your original mortgage. Get quotations from three or four different lenders so you can compare interest rates and closing fees.
When comparing quotations, don't just look at the interest rates; look at the annual percentage rates (APRs). The annual percentage rate (APR) is the interest rate plus the expenses of discount points and fees. This figure is greater than the interest rate and more accurately reflects how much you'll spend on your new mortgage each year.
If you want to do a cash-out refinance, you must first figure out how much equity you have in your home. The percentage of your house that you have paid off and own free and clear is referred to as equity. You create equity because you pay down some of your primary debt each time you make a mortgage payment. When you choose a cash-out refinancing, you can take a portion of this equity as cash. Because mortgage interest rates are lower than other forms of debt, many homeowners select cash-out refinances when they need to pay down debt or cover repair expenditures.
With refinancing, most lenders won't offer you 100% of your equity. Expect to be able to borrow between 80 and 90 percent of the value of your house. This is why it's crucial to know how much money you'll need before applying and if your equity will be sufficient to pay it.
These are just a few tips to help you have a more pleasant refinancing experience. Knowing your financial status, understanding your refinance choices, and maintaining contact with your lender can guarantee a smooth refinance.
Refinancing, like sale and purchase transactions, is complicated and necessitates due investigation on the part of homeowners contemplating it. Speak with a trusted lender to get immediate answers to your questions. This will assist you in deciding whether or not refinancing is suitable for you.
Assistant Manager, Real EstateTreadstone Associates