Mortgage refinancing is a term used for a new mortgage on your property when it replaces the old one. It generally comes with a set of new terms and conditions. However, the word is often misunderstood by many who associate it with a second mortgage, which is not the case. Mortgage refinancing allows a borrower to acquire a better interest term and rate only after the first loan is paid off. It can help you reduce monthly payments, take cash out to make other important purchases or select a new mortgage company to lower interest rates.
If borrowers show good credit history, refinancing offers a better variable loan rate at less interest to be fixed for the new loan. But if borrowers have low credit or questionable credit history with too much debt, refinancing can result in more risks as lenders look for ways to safeguard themselves.
Should you Refinance Your Home?
A home mortgage can cause a lot of stress to the borrower as it can get challenging over the years. If earning fluctuates due to job changes or an unstable economy or interest rates go up, timely mortgage payments become more difficult. This is when refinancing can help.
However, refinancing needs knowledge about the market conditions, financial management and awareness of the current rates in your neighbourhood. It is a good option when you have enough equity in your home (the difference between the amount required to pay the mortgage company and the worth of your home).
There are several advantages to refinancing:
- It can help reduce interest rates.
- As income increases and bills are paid on time, credit score improves, which helps bring down interest rates.
- Lower interest rate helps reduce monthly payments, with the potential to save you hundreds of dollars every year.
- Refinancing can help you purchase on other big assets, such as a car or invest in home renovations or education. You can also use it to pay off credit card debt.
There are a few risks to refinancing too. There is a possibility of penalties on paying your mortgage with your line of home equity credit. Many mortgage companies charge a hefty fee for this that can amount to thousands of dollars. It is important to fully understand the terms and conditions for refinancing and make sure that it covers the penalty. There are other costs involved before refinancing, such as attorney fees to help you handle complex documentation that follows after getting you the best deal, as well as bank fees. The bank fees can be avoided or the amount can be reduced, provided you take time to shop around. However, there is still a lot of savings in the long run, which makes the risks worth a consideration.
How Can You Refinance?
If you are considering refinancing, first figure out how to pay the loan. If you wish to use a home equity line of credit for home renovations, it might help to invest at a later stage, such as before selling your home. However, some large expenses cannot be delayed, such as a car or investment in education or to pay credit card debt. Get in touch with a finance professional to understand ways to pay back the loan or discuss other options available that could benefit you and lower the risks. In all possibility, the original money lender can offer a better rate, so it may serve better to stay with them than look for an unknown new lender unless they are reliable mortgage professionals who make it worthwhile for you.
At SAN Mortgages, Toronto, we provide ways to offer the best terms and rates that suit your current circumstances. A rate reduction can have a huge impact on your long-term mortgage payment. Talk to our experienced specialists to discuss the best refinancing strategies for you that save you money and provide you with peace of mind.