If you’re trying to pay for renovations, refinance a loan or consolidate debts, mortgage refinancing could be a useful resource. You might be able to use your home’s equity to secure a loan and open up some new financial options. But this isn’t the right choice for every homeowner; make sure you understand how refinancing works and what your other options are first.
Refinancing your mortgage means ending your current mortgage to secure a new mortgage that better suits your current financial situation or goals. The new mortgage could have better terms or a more favourable interest rate.
You’ll be given a new principal payment and interest rate based on what you’re eligible for, and then end up with a new mortgage. It’s ideal to secure a new mortgage when your current mortgage term has already ended or you might have to pay penalties to break the contract. If your term hasn’t ended, refinancing means paying the cost of ending the mortgage term you have on your current loan to secure and sign a new one.
Refinancing is one way to secure a loan with a lower interest rate. Mortgage interest rates are typically lower than the average loan you get from a bank. Some people refinance to pay off their home loan early, because they want to switch to a fixed interest rate or because they want to switch to a different kind of lender. You may have different opportunities than when you first secured your home loan, especially if your financial situation has changed since you first found a lender.
Use these guidelines to avoid fees, penalties or consequences when you’re considering refinancing:
Calculate what your fees will be if you refinance your mortgage. This could include appraisal, registration fees, title insurance and other surprise costs. Keep in mind that fixed-term mortgages usually charge a bigger fee for refinancing before the contract term has ended. Variable-rate mortgages still charge a penalty if you’re refinancing before the contract ends, but it’s typically far lower than a fixed-term mortgage.
Get a solid understanding of competing mortgage rates. Before you assume the grass is greener, ask your financial advisor to help you establish what mortgage rates you might be eligible for. If you borrow more money, it will likely take longer to pay off your mortgage. Consider how your long-term savings and budget are affected.
Be clear on your motive, and consider whether using your home equity is the best financial option for achieving your goals. If you’re looking to consolidate debt that you’re currently paying high interest on, look at other loan options to weigh them against the rate you’d pay if you refinanced. Does this still save you money if you’re adding in the amount it costs to break your existing mortgage or appraise your property?
Choose a mortgage broker you feel comfortable talking to, so you can confidently ask questions when you get your new loan agreement. Your broker can help you explore your options, collect all the relevant documents and submit them for you when you decide to refinance.
Your financial advisor can help you weigh your options and look into other options for loans, debt consolidation or government programs that could save you money. You may want to consider a Home Equity Line of Credit (HELIOC) or government programs like the Multigenerational Home Renovation Tax Credit (MHRTC) that helps fund home renovations being made to accommodate a family member or individual with a disability.
Loan modification is a method of renegotiating your loan terms without breaking your mortgage agreement. Choosing a loan modification instead of refinancing can offer benefits like a lower fixed interest rate, a longer loan period and avoiding the penalties that mortgage refinancing can require. Missed mortgage payments harm your credit score and can make it harder to get a loan in the future, so mortgage loan modifications can offer homeowners relief during a tough financial passage without affecting your credit score. Not all lenders will allow for loan modification, and each lender that does will have limits to what they’ll allow you to change.
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This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.
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