What is Refinancing?
Refinancing refers to replacing and revising the terms of an existing loan or mortgage, which is usually related to credit agreements. When an individual person, small business, or a corporation opts to refinance a credit obligation, they seek to make favorable and good changes to their payment schedules, interest rates, and other outlying terms and conditions written in their agreed-upon credit contract. If the changes are approved, the borrower gets a new contract that takes the place of the original one.
Refinancing is also the process of getting a new mortgage to replace the original one. It is done to allow a borrower to acquire a better and more efficient interest rate and term longevity. There are instances that the first loan is paid off so they can allow the second loan to be created instead of making a new mortgage and just throwing out the original one.
For those borrowers with an outstanding credit history, refinancing can be the best way to convert a loan rate to a fixed rate. They can even obtain a lower rate. But for those borrowers with not-so-good-looking credit or who may have too much debt, it may not be good to do refinancing as it can be very risky.
What is a Refinanced Mortgage?
To put in simple terms, a refinanced mortgage means replacing the current mortgage with a new mortgage that usually favors the borrowers’ terms. The borrower customizes the terms and details of the new mortgage contract. And in order to have the mortgage replaced, the loan must be paid off first.
Often people use refinancing to reduce the interest rate, tap into their home’s equity, cut monthly payments, or pay off a loan faster – switching from an adjustable-rate to a fixed-rate loan.
Mortgage Refinancing Best for Big Savings with Lower Rates
The advantage of mortgage refinancing as a viable financial product in well known in Canada to mist homeowners and mortgage borrowers in terms of good savings, reduced monthly payments and access to cost effective funds sooner for any purpose.
A mortgage refinance is a “term loan” for which a homeowner is eligible on the basis of available home equity. He can apply for the same amount as in the current mortgage or for a higher amount to pay off the existing mortgage and start a new one afresh.
Defining mortgage refinancing is simple, operationally it means, breaking an existing mortgage and starting a new one for express cost-benefit.
Mortgage refinancing Canada is deemed financially prudent as it offers a larger amortization period, lower rates and many sops like a home equity line of credit that can deliver funds to address any need including investments in commercial property.
When to do mortgage refinancing
As for mortgage refinance options, the best timings are when interest rates go down and the second season is when the mortgage term is about to end. In the latter, it is sensible to pay off the outstanding balance and start a new mortgage.
Both the mortgage refinance payment calculator and mortgage refinance savings calculator will determine the assorted gains from a new mortgage refinance loan and mortgage refinance options.
The benefit of mortgage refinance is extra cash that will accrue and can be utilized for any other purpose. As the money gets remitted directly into the borrower’s savings account it can be used for any need. This dodges the need for taking a second mortgage or private mortgage.
Mortgage refinancing is feasible as it provides funds at lower borrowing costs when interest rates are down. The mortgage prepayment calculator gives the estimated cost of breaking the current mortgage in a mortgage refinancing plan with details like the new mortgage term plus scope for migration to a new loan rate.
As for rates, lenders in Canada offer attractive five-year variable and five years’ fixed rate closed term mortgages. The best variable mortgage rates these days include 0.95, 1.20, 1.25, 1.30 per cent per annum.
Types of Mortgage Refinancing
1. Rate-and-term refinancing
Rate-and-term refinancing is the most common type of mortgage refinancing. This type of refinancing enables or permits the borrower to an adjusted rate or adjusted term for the mortgage loan in the process of refinancing. For this, the borrower may take good advantage of the current economic environment or adjust the mortgage to favor their situation.
To provide an example, the borrower would want to initiate a rate refinancing to adjust the current interest rate that they pay downwards if the market interest rates are decreasing. Moreover, they too can initiate a term refinancing to adjust or shorten the mortgage loan term if the borrower starts to generate more income and can now afford a higher monthly payment.
2. Cash-out mortgage refinancing
Cash-out mortgage refinancing is common when there is an increase in value on the underlying asset that collateralizes the loan. The process includes a withdrawing transaction of the value or equity in the asset in exchange for a higher loan amount and often has a higher interest rate. In other words, when an asset increases in value, you may loan it rather than sell it to have access to that said value increase.
Also, cash-out refinancing may include customization of the rates or terms of the mortgage loan. However, the main difference for cash-out refinancing is that the new mortgage loan is higher than the initial mortgage loan. The value of the new mortgage over the old mortgage is paid out subsequently as tax-free cash to the borrower. This is actually tax-free since the paid amount does not add or contribute to the taxable income for the borrower.
So, for example, if a current mortgage is $300,000, but the borrower wants to cash out on the property equity portion, they may initiate a cash-out refinancing that increases the mortgage to $350,000, and they receive a tax-free $50,000.
3. Cash-in mortgage refinancing
A cash-in mortgage refinancing enables the borrower to settle down some part of the loan for a smaller loan payment. Cash-in refinancing is the reverse or opposite of cash-out refinancing.
This type of refinancing needs the individual or business to apply for a new loan at a lower rate. Afterward, pay off existing debt with the new loan, leaving their total outstanding principal with considerably more affordable interest rate payments. With a cash-in refinancing, the borrower uses cash for a new mortgage with a cheaper loan balance than the original loan. This could actually result in a lower mortgage rate, a more short-term, or it could be both.
A borrower must approach either their current lender or a new one with the application and finish a new loan application to process a refinancing mortgage. Note that refinancing subsequently requires re-evaluating an individual’s or a business’s financial situation and credit terms.
If you’d like to discuss refinancing, give us a call today to review your options. We have one of the top mortgage brokers in Canada, Saif Abdulah. He is the best mortgage broker you can have a conversation with regarding refinancing queries and concerns.
If you are from Toronto, North York, Scarborough, Pickering, Oshawa, Ajax, Whitby, Etobicoke, Thornhill, Richmond Hill, Markham, Stouffville, Uxbridge, Vaughan, Concord, Woodbridge, Mississauga, Oakville, King City, Caledon, Nobleton, Milton, Aurora, Newmarket, East Gwillimbury, Keswick, Bradford, New Tecumseth, Georgina, Innisville, Guelph, Barrie, Ottawa, Orangeville, Collingwood, Kitchener, Hamilton, Cambridge, Waterloo, St. Catharines, Niagara Falls, London, Peterborough, or Ontario, don’t hesitate to contact us. We’ll help you find the best option that can help you get back on firm and secure financial footing. It would be our privilege to make you feel more financially empowered!
Savings from mortgage refinancing
The amount, interest rates on the mortgage financing deal are best determined using a mortgage refinance calculator. It will show how mortgage refinancing saves a lot of money if the occupant is staying in the same home for a longer period. As noticed, mortgage refinancing is the right way to enter a lower interest rate regime warding off pressures of adjustable-rate mortgages or private mortgage insurance costs.
Mortgage refinancing addresses pain points in an existing mortgage while transiting to a better interest regime. There exists an adjustable-rate mortgage, (ARM) plan where the interest rate keeps changing periodically causing a jump in monthly payments throughout the loan’s tenure.
The popular adjustable-rate mortgage is the 5/1 ARM where the starting rate stays for five years. After that, the rate changes with each year. By opting for mortgage refinancing, it is easy to migrate to a fixed mortgage from an adjustable-rate mortgage.
For example, if there is a 5/1 ARM, go for mortgage refinancing by the end of the fifth year to a steady rate with a 30-year fixed-rate mortgage that can yield handsome savings every month.
Private mortgage insurance or PMI is another issue–if the home buyer brought the house via mortgage with less than 20 per cent “down payment” PMI is mandatory to protect the lender against any loan default.
But the annual PMI premiums can pinch with costs varying from 0.5 to 1.5 per cent of the mortgage value. For such borrowers mortgage refinancing is a big relief.
Mortgage refinancing costs
Mortgage refinancing is lucrative but upfront costs are involved. However, the savings justify the mortgage refinancing option. Major mortgage refinancing costs are mortgage refinance fees and a penalty on the premature breaking of the mortgage.
The mortgage refinance penalty depends on the size and term of the mortgage. There will be variations in the rates of penalty for mortgage refinance. In a fixed-rate and variable mortgage, the prepayment penalty will differ. In some cases, if the mortgage refinances is being done with a current lender the breakage penalty gets waived.
On the question of how to do refinancing a mortgage, there are procedures associated with mortgage refinancing with each step requiring some fees. The following are some of the costs of mortgage refinancing in Canada.
- Mortgage discharge fee
- Appraisal and inspection fees
- Mortgage registration fee
- Legal fees
Mortgage refinancing for applicants with bad credit
For a lender to process a mortgage refinancing petition, it will focus on home equity factor. For all borrowers, mortgage refinancing makes sense only if it gives better savings on the existing mortgage interest rate. This raises the question, whether customers with bad credit or poor credit ratings can avail of mortgage refinancing options. The answer is yes if there is the support of an experienced mortgage broker.
There is scope and benefit of mortgage refinancing for bad credit holders as well. The exercise will save them precious bucks over the years and give relief from biting mortgage rates.
Mortgage refinancing applicants struggling with credit rating issues can consult expert mortgage brokers like Saif Abdulah in Ontario and get help in finding the right lender.
Mortgage refinancing Vs mortgage renewal
The mechanisms involved in mortgage refinancing are different from mortgage renewal as mortgage refinancing involves a new mortgage after paying off the old one by taking a new mortgage loan. There is considerable awareness on financing matters with updates from outlets like yahoo finance and others on mortgages. But it must be clear that mortgage renewal implies going ahead with an existing mortgage under the terms offered by the lender with or without modification for another term.