If mortgage rates have been on the rise for a while, and they start to fall, it might be a good time to look at your options when it comes to refinancing. Low rates aren’t just a boon for first-time homebuyers; they're great for property owners looking to explore new offers. Even if your mortgage isn’t coming up for renewal, it might make sense to refinance your mortgage and take advantage of the current market conditions.
We’ll explore some situations when refinancing your mortgage might make sense.
Also read: A Simple Guide to Refinancing
Consolidating Debt
Sometimes unexpected and expensive things happen, your car breaks down or your roof starts to leak. Unless you have emergency savings, you might need to rely on a credit card. With most credit card interest rates at 19% or higher, it can be quite costly, especially if it’s going to take you several months or years to pay off the debt. Why not instead roll that debt into your mortgage?
When you consolidate debt, you can take advantage of today’s low mortgage rates by using them towards your consumer debt. Not only can you save on interest, but you could also be debt-free sooner.
Taking Advantage of Low Mortgage Rates
If you got your mortgage when rates were higherDid you sign up for your mortgage when rates were a lot higher? Then it might make sense to refinance. Likewise, even if you have a variable rate mortgage, it might make sense to refinance. It’s worth shopping around and seeing if you can get a bigger discount off prime rate. The discount off-prime rate you received from your lender depends on the lender and where rates were at the time. If it makes sense to stay with your current lender but if you could save money by moving to another lender, you might want to consider it, just factor in any potential penalties.
Are you looking to refinance? The Borrowell Mortgage Coach can help!
Buying a Second Property
When you signed up for your mortgage, did you choose a shorter amortization period than you had to? If you’re looking to buy another property, a shorter period can make it tougher to qualify for a mortgage. The higher mortgage payments coupled with the mortgage stress test may mean that you don’t qualify to spend as much on an investment property as you hoped (or you might not qualify at all). By lengthening your amortization period, you can have more options in terms of investing in real estate.
Reducing your Monthly Mortgage Payments
Another reason you might want to change your amortization period is to lower your mortgage payments. In uncertain economic times, it’s a good idea to be financially prepared. Sure, you can build a sizeable emergency fund, but that takes time. Financial experts recommend socking away three to six months’ living expenses in a savings account.
A simpler way to provide you with immediate cash flow relief is by extending the amortization period on your mortgage. The amortization period is the total length of time it takes you to pay off your mortgage and by extending it you'll lower your monthly mortgage payments. This can provide you with some much needed financial relief in case you’re concerned that your partner or you could lose your jobs.
If you’re thinking about refinancing to lower your monthly mortgage payment and your job situation is uncertain, it’s a good idea to do it sooner rather than later. In most cases you’ll need a source of income. If you lose your job and decide to refinance, it might be too late since you may no longer have the income to qualify.
Accessing Funds Through Home Equity
If you have diligently paid down your mortgage over the years, you could have a lot of untapped home equity.
Accessing home equity can make sense in many cases. For example, if you want to pay for costly home renovations, gift your adult children money towards their down payment or set up a rainy day fund.
By setting up a home equity line of credit (HELOC), you could access up to 65 percent of your home’s value.
HELOCs are super flexible. You won’t pay any interest so long as you don’t borrow any money. Most let you make interest-only payments, meaning in times of financial stress you can choose to pay the minimum payment if you want. You could also borrow money from your HELOC to pay your mortgage payments if you really find yourself in a financial bind.
Who Can Refinance?
In order to refinance your mortgage, you need to be a well-qualified borrower. This means if you’ve lost your job, you may not qualify for a mortgage refinance.
When considering your mortgage refinance application, lenders look at the same criteria as they do when you’re signing up for a new mortgage, mainly income, credit score, debts, assets and the property itself. So it’s important to take a look at your credit report before you start the process.
It’s important to note that not everyone with a mortgage can refinance. To be able to refinance your mortgage you need to have at least 20 percent equity in your home. If you put less than 20% down on your home and you haven’t quite reached the 20 percent equity mark, unfortunately refinancing your mortgage isn’t an option quite yet.
The Costs of Refinancing
Before refinancing your mortgage, it’s important to be aware that there may be costs. You may be required to pay a mortgage penalty with your existing lender. You might also be required to pay mortgage transfer fees and an appraisal fee, although some lenders will cover that or let you capitalize that into your mortgage.
It pays to shop around if you’re refinancing and get a mortgage professional to help you crunch the numbers, since savings might not be obvious at first glance.
It usually makes sense to refinance your mortgage when the benefits outweigh the costs. You’ll want to do a cost-benefit analysis to see if that’s the case, and calculate how much money you’ll be saving from refinancing your mortgage versus doing nothing.
When calculating your savings from refinancing your mortgage, it’s important to factor in all of your costs. For example, are you required to pay mortgage breakage penalties? If so, you’ll want to make sure the interest savings are greater than the penalties.
Even if the penalties are greater than the interest savings, sometimes it still makes sense to refinance. As mentioned above, if you’re looking for immediate cash flow relief because you’re worried about job security, it can make sense to move forward with the refinance, even if the interest savings don’t justify it at first glance.
The Bottom Line
Your credit score carries a lot of importance when lenders and brokers are taking your information and calculating your interest rate. If you’re looking to refinance your mortgage, check out the Borrowell Mortgage Coach to find the best options for you based on your unique credit profile.
About the Author
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense.