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What is a mortgage refinance?
Refinancing your mortgage means breaking the existing mortgage agreement with the current financial institution and obtaining a new loan from to cover a previous loan on better terms. Better terms may mean a lower interest rate and thus a lower loan cost and a higher loan amount to cover other expenses. There is also the possibility of extending the loan term and reducing regular payments.
To refinance efficiently and profitably, borrowers must do some calculations to see if it makes sense from a financial perspective.
Typically, borrowers choose to refinance at financial institutions for the following reasons:
One can save money on loan payments due to lower interest rates. This reason is valid if the penalties for canceling the mortgage are less than the amount of interest that may be saved. If the difference is slight, canceling an existing loan makes no economic sense. However, if the borrower has used the services of a financial advisor or mortgage broker, they can save thousands of dollars.
Changing the original mortgage type. For example, a borrower may want a longer loan term, lower interest rates and associated fees, or a change from a variable rate to a fixed rate, especially if the variable rate increases for some time. Sometimes, switching to a more favorable mortgage product within the same mortgage lender is possible. This may be a flex mortgage product, for example.
Change of lender for financial or other reasons known to the borrower.
Mortgage refinancing is considered riskier and more complicated than mortgage renewals. According to the statistics, the percentage of approved mortgage renewals is higher than that of approved mortgage refinances.
Refinancing is considered a higher credit risk for lenderы, which is why refinance mortgage rates are usually higher than a new home purchase mortgage or an extension of an existing mortgage loan. The risk is higher because the borrower can borrow more using equity. For example, borrowers can only use 65% of their equity with a HELOC, while refinancing allows up to 80%.
A comparison of refinance options can be made as follows:
Manual calculations after searching for available options from lenders according to your expectations criteria;
A mortgage refinance calculator automates the calculation process and eliminates some human errors associated with the use of formulas, but still, the borrower must take time and review offers and collect initial data;
A mortgage broker gathers information and interviews borrowers to understand the current situation and what is needed and expected. A mortgage broker provides information on the available options and assists in the documentation process from point A to point B to ensure the best possible interest rate and terms for each specific case;
A personal financial advisor to analyze the current situation and determine if it makes sense and what options would be better for the borrower.
A mortgage refinance is about making efficient use of the borrower's funds and reducing an excessive loan burden by switching to a fixed-rate mortgage and being able to ensure debt consolidation (it includes credit card debt, other higher interest debt, variable rate mortgage, home equity line), and down the percentage of high-interest debt.
Types of mortgage refinancing
Refinancing a loan to make it efficient requires an analysis of the existing mortgage lender's current loan product.
There are the following types of mortgage refinancing:
Cash-out refinancing for mortgages means a lump sum given upon your refinance loan closing. This difference between the first mortgage and the new loan can be used for other purposes and withdrawn as cash. The new loan replaces the old one, but the borrower should carefully examine the new loan's terms and ensure that the new loan is better than the previous one.
Cash-in mortgage refinancing is applied when the property price has decreased, i.e., the secured property now costs less than when the mortgage was approved, by putting money into the loan balance and diminishing the loan-to-value (LTV) ratio and increasing the equity of the real estate property.
Reinvestment of mortgage loans with new terms and interest rates means changes to an existing mortgage. The loan amount does not increase, but the borrower receives the benefit of not having to pay fees when using a mortgage loan from the same lender.
A reverse mortgage is an upside-down mortgage because the borrower receives money from the lender during their life or until the property is sold. However, it does not eliminate the need to pay homeownership fees and other taxes.
This type of refinancing is popular with borrowers age 62 and older.
When the borrower dies, or the home is to be sold, the mortgage becomes due. It is either repaid by the sale of the house or must be refinanced by the borrower's heirs. Not all lenders offer the reverse mortgage option.
In mortgage refinancing without closing costs, the borrower does not have to pay closing costs on the existing mortgage. Still, the lender compensates it with a higher interest rate if a borrower does not plan to live in the home for a long time or needs cash that would have to be paid to the lender under other circumstances.
Short-term mortgage refinancing is an emergency lending tool needed for borrowers who have defaulted on their mortgage loan and are close to foreclosure. Such a refinancing option allows equity to be preserved, regular payments to be lowered to an affordable level, and is also beneficial to the lender, who does not have to incur high costs to foreclose and liquidate the property. However, this emergency refinance comes at a cost to the borrower and can affect credit scores as circumstances of payment problems, and refinances are recorded.
How does mortgage refinance work in Canada?
Refinancing in Canada consists of a series of steps, some of which have to be done on the borrower's side and others by the lender and other specialists such as lawyers, notaries, etc.
The first step is to weigh the pros and cons of whether refinancing is worth it from an expense perspective. At this stage, the client can consider its strong and weak sides on their own by checking how much the property might cost and by using online services to check the creditworthiness, credit report, financial sense, income situation, expenses, and needs. Alternatively, a financial advisor, accountant, or mortgage broker can gather and analyze the information needed for consolidating debt.
Next, one selects the lender for the mortgage refinance and begins negotiating details, processing the application, and providing the necessary documentation. This process would require a new home appraisal (checking the value of your home or another property).
Once the details are agreed upon with a lender, the lender reviews the documentation and decides to pre-approve the refinance. This step may turn into final approval if all details are accepted and approved by the lender and the borrower. The mortgage refinance is then complete, and if it involves paying off a portion of the mortgage, the borrower will have that money available. It is essential to take good care of the refinanced mortgage loan; otherwise, there is a risk of losing the property and having problems with one's credit rating, which reduces the chances of getting approved by reputable lenders at minimal interest rates.
The borrower has to ensure that the refinancing fees are transparent, acceptable, and fully disclosed by the current lender of the primary mortgage and the new lender.
The lender may offer a conventional loan to lower monthly payments through loan prolongation. The outstanding balance of a mortgage is important for first, second, and other mortgages. Mortgaged real estate becomes investment property to some extent.
Where to refinance your mortgage in Canada
Mortgages in Canada can be refinanced with various lenders such as:
Banks;
credit unions;
other lenders.
It is recommended to explore as many available mortgage refinancing options as possible based on the value of your home, mortgage type, home's equity, loan term, current mortgage balance, current mortgage rate, etc.
Requirements
The criteria for mortgage refinancing are based on the legal requirements for signing legally binding documents and the rules established by the State and financial institutions for this procedure:
age of majority;
ability to sign legally binding documents and enter into agreements;
good payments history;
equity should be at least 20%;
have an excellent credit score (or any if acceptable to the lender and the borrower is willing to pay the interest offered);
be a Canadian citizen or have permanent resident status;
have a stable income, etc.
Borrowers should check with lenders (a current lender and a new lender) and for a more detailed list of mortgage refinancing requirements.
Note: it is essential to check legal fees, including mortgage registration, options for renewal, and fixed-rate mortgages.
Is refinancing the same as a mortgage?
Any completed repayment means equity in your home, and that equity can be used to borrow money. However, a second mortgage is not the same as a mortgage refinance, and here is why:
A second mortgage can be paid against the equity the borrower owns in their home in the form of a lump sum or line of credit. At the same time, the borrower can get a refinance on their mortgage.
A second mortgage means that the house is encumbered with a lien, which means that the borrower cannot dispose of it at their discretion, e.g., sell it or give it away, as it belongs to the lender until the loan is repaid. In both cases, i.e., refinancing and taking out a new mortgage, one cannot access the equity in the house.
One of the risks of taking out a second mortgage is that if you have trouble servicing the loan, the risk of foreclosure doubles, and the credit burden increases.
Pros and cons of mortgage refinancing
Pros
Using home equity, borrowers can cash out refinance and get funds to cover remodeling or renovation of home, tuition, consolidation of expensive loans, or use the money for other purposes if allowed by the product;
home equity is a guarantee that the loan will be repaid, and it reduces the risks to the lender;
the borrower keeps the property and continues to use it;
mortgage lenders may help the borrower to keep home by offering emergency refinance, which can put them back on track with more affordable regular payments;
mortgage payments for a correctly chosen mortgage refinance are lower as well as interest rates.
Cons
financial institutions would require new evaluation;
if a mortgage refinance was not chosen correctly, monthly payment savings may not be compensated with expenses on penalty fees for breaking the initial mortgage;
mortgage refinance is a complex procedure, and the borrower is suggested to use the services of a lawyer to analyze terms, the fine print of the mortgage agreement contract, and private mortgage insurance of the current mortgage;
refinancing affects credit score;
it the borrower takes refinance or uses second rank mortgage, it is a risk of losing the property when failing to service the loan.