10 Things You Need To Know

About Refinancing Your Mortgage

Refinancing a mortgage can help you:
  • lower your rate
  • lower your monthly debt payments
  • access the equity in your home.
 
In this article, learn if it makes sense for you, how the process works and if there are other options to consider.  
 

Why consider refinancing?

First off, let's look at the common two types of refinancing: within your term and at the end of your term. In both cases there are several fees involved throughout the refinance process which we discuss in the costs of refinancing

But, why would I want to give up my old mortgage and take out a new one?

That’s a great question. You might want to consider a mortgage refinance for several reasons. Here are a few common ones:

  • Access the equity in your home renovations.

  • Access the equity to pay off high interest debts, or reduce monthly payments. 

  • Access the equity to access cash (example: for down payment to another property or remove borrower from title - divorce)

  • Lower your interest rate

  • Lower your monthly payment or increase your available monthly cash flow.

  • Shorten the mortgage term

  • Lengthen the mortgage term

 
 

Refinancing can be both a money-saver or a money-loser

If interest rates have fallen since you took out your mortgage, refinancing might help you get a lower rate. Whether you save money on your monthly payment, the total interest charges over the life of the mortgage, or both depends on the refinance loan terms.

Example:

Say you have 16 years left on original 30 year amortization mortgage with a balance of $250,000, and you decided to refinance your current rate 3.15% to a lower rate 2.59% (both 5yr fixed terms), but also extend the amortization to 30 years. The result is you could lower your monthly payments of approx. $650.00 per month.  Great, right?

Not really, starting over with a new 30-year loan puts you back at square one in terms of paying off the mortgage. Paying the first mortgage for 14 years and the second mortgage for 30 years will result in more than $50,000 of additional interest charges. Over time, this is generally a money-losing scenario. 

As you can understand, refinancing only to obtain lower  rate is a much easier calculation, but just keep in mind not just on rate, but also the amortization when working with you mortgage broker/lender. 

 
 

Calculating the break-even point

It’s important to understand the costs of your mortgage because a refinance is not guaranteed to save you money. Mortgages are not free.

Let’s go back to our hypothetical example. You take the 20-year mortgage mentioned above and your closing costs amount to 2 percent, or $4,082. With a monthly out-of-pocket savings of $73, you’ll recoup your closing costs in about 56 months. That’s your break-even point. If you sell the home sooner, you could lose money by refinancing to the lower rate.

You could tap into your home equity with a cash-out refinance (but you might not want to)

 

With a cash-out refinance, you get a new mortgage for more than you owe on the home. The difference represents your equity. At closing, you get the equity in the form of a cheque.

So you might be wondering why you might want to consider taking yours out of your home. After all, building equity builds wealth, right?

The simple answer is that a cash-out refinance can put cold, hard cash in your hands, and that may be a priority for some people. It’s money you could use to:

  • Buy an investment property (This is our favourite. Make sure you subscribe to our newsletter, as we will show you 4 Ways To Win by owning an investment property.  The actual ROI (Return on Investment) will shock you.  

  • Consolidate or pay off debt, including student loans

  • Make home improvements or repairs

  • Cover college expenses to go back to school (or pay for education expenses for your kids)

  • Invest for retirement. 

  • Buy a second home 

  • Pay medical expenses

  • Meet working capital needs if you own a business

 

…or cover just about any other expense.

 

The amount of equity you can access with a cash-out refinance is typically 80% of the value of the property at the time of refinancing (80% Loan to value LTV).

Downside to cash-out refinance

Some people say no debt is good debt. If your goal is to work toward total debt freedom, you might want to think twice about increasing the amount of money you owe on your home.

You should also think twice about using a mortgage secured by your home to pay for things unrelated to the home and its value. Want that addition? Okay. That addition may add value to your home. If you can’t pay the mortgage, you might be able to sell it and recover all the money you owe. On the other hand, if you want to pay your child’s or grandchild’s tuition, there might be a better financial strategy to explore. 

Remember that when you take a cash-out refinance, you own less of your home. If you decide to sell the home before the mortgage is paid off, you may not pocket as much money as you would have if you had stayed in your original mortgage.

 
 

What does it cost to refinance a mortgage?

The chart below outlines which fees need to be paid under each circumstance. You can also see how much refinancing your mortgage will cost you, by using our mortgage refinance calculator.

IMG_6123.jpg

Mortgage prepayment penalty

If your refinance requires you to break your mortgage early (before your term is up for renewal), you will have to pay a mortgage prepayment penalty fee, in addition to the other fees listed in the chart above. If you have a fixed rate mortgage, your prepayment penalty will be the greater of:

  • Three months’ interest or

  • The interest rate differential (IRD).

If you have a variable rate mortgage, your penalty will be three months’ interest. Both penalties are explained in more detail on our mortgage prepayment penalty page. If you are refinancing when your mortgage term is up for renewal, you don’t have to pay a prepayment penalty. 

Mortgage discharge fee

If you are switching lenders, you’ll need to pay a fee to discharge your mortgage from your current lender. Each lender sets its own fee rates, and every province is different, but discharge fees are typically between $200 - $400. 

Mortgage Registration Fee

Whether you’re leaving or staying with your current lender, you must pay a mortgage registration fee. Part of the refinance process involves your lender removing the current mortgage amount from the title on your property and re-registering it with a new mortgage amount. Your registration fee is governed by your provincial government and is typically around $70.

Legal Fees

When you refinance your mortgage, you’ll need to consult with a real estate lawyer. Your lawyer will review your mortgage loan and its terms and conditions, register the new mortgage, and conduct a title search to make sure no leans have been made against your property. It’s the lawyer’s job to facilitate the entire financial transaction between you and the lender. Legal fees for a refinance typically range between $800 and $1,200.

The good news!

If you are switching lenders, some lenders will offer to cover a substantial amount of the fees.  As well, many lenders will allow you to capitalize your interest penalty up to a specific amount into the new mortgage.  To determine, we recommend working with a trusted mortgage broker.  

 
 
 

How to qualify for mortgage refinancing

Mortgage lenders examine several factors to make mortgage financing approval decisions. Here’s a quick checklist of things you’ll want to review before you apply:

  • Your income

  • Your credit score

  • Your debt to income ratio (how much of your paycheck goes to debt repayment each month)

  • What your monthly housing costs will be if the mortgage is approved

  • Any equity you have in the home and the loan-to-value ratio (or LTV -how much you owe on the home compared to its value)

Every lender sets its own guidelines for qualification. Consider shopping around with at least two lenders before you choose a mortgage. Comparing lenders can give you an idea of which mortgage options you’re most likely to qualify for. It’s also a chance to compare rates and terms.

Is mortgage refinancing right for you?

A refinance can be a smart move in certain situations. You might get financial relief right now from a lower payment, or significant money savings over time from a lower interest rate. Refinancing might help you lock in a fixed-rate mortgage, or cut financial ties with your former spouse. Whether it makes sense for you depends on your reasons for refinancing and what you stand to gain.

If you think a refinance might be a good option, consider talking to a mortgage broker. Ask friends and family for referrals, or call your bank’s mortgage department. A mortgage professional can help you explore options that might meet your needs.

While you consider your refinance options, review your financial big picture to see if there are any other steps you can take toward your goals. When you make a big financial commitment, it’s important to consider “what if” scenarios. A mortgage is a significant liability, and it’s smart to consider how your family would stay financially afloat if something were to happen to you before the mortgage is paid off. For many people, a term life insurance policy that covers your for a specific time period is an affordable way to provide a financial safety net during the time of life we need it most.