08 Dec When Does it Make Sense to Refinance Your Mortgage?
Earlier this month the Bank of Canada (BoC) made their regularly scheduled interest rate announcement, and rates appear to be holding steady until the end of 2015. You may have been debating refinancing your mortgage and asking yourself “Is refinancing a smart option?”.
There are a few financial penalties you should be aware of when it comes to re-negotiating, which, is why you should always assess all the pros and cons when considering to refinance your mortgage.
Some questions to ask yourself are:
– What might it cost to get out of my existing mortgage plan?
– Do I have equity in my home?
– Is my credit score good enough?
– How long am I planning on staying in this current home?
– Do I have a second mortgage or a line of credit?
By asking yourself these questions, you will gain a clearer perspective on whether this is an option that you’re willing to pursue. Your lifestyle and your current financial situation will play a big factor in deciding if this is the right choice for you. If you are unsure of how your answers to these questions relate to a positive outcome for refinancing, don’t worry, we are going to look into that right now.
Penalties of an Existing Mortgage Plan
Two common penalties people face are that they will need to pay either three months interest or the interest-rate differential (the difference between the interest you promised to pay and what the lender can earn today on a mortgage of your size). Often, the interest-rate differential can be quite high, and your lender will ask you to pay the equivalent of what they might lose by letting you part ways with your mortgage plan. While most loans today might not have a prepayment penalty, older loans tend to come with that restriction (meaning your financial loss could outweigh your financial gain). However, talk to a mortgage professional to figure out your best options and what will benefit you both short and long term.
How Equity Helps
You need at least 20% equity in your home to qualify for a new loan without having to pay private mortgage insurance. However, if you are below the 20 percentile mark, that doesn’t mean all hope is lost (it just might be harder to swing a refinance).
Consider Your Credit
Obviously, a good credit score will help you in any situation, but having a good score when refinancing will make the process a lot smoother. Lower rates will be rewarded to those with a credit score of 720 or higher, however, those with a score of 620 and below might have problems qualifying for any mortgage rate.
What to do if You Plan to Move Soon
Assess how long it will take to break-even and how long you plan on staying in your home. A rule of thumb is if you are staying in your house for five years or longer, refinancing might be a great option. However, if your plan is to move out in two years or less, then refinancing your mortgage does not make any sense. Also, if you are close to paying off your mortgage, refinancing could be counter-productive because of additional costs acquired.
Line of Credits and Second Mortgages
When you are tied to a second mortgage, the option of refinancing becomes more complex. One way to rectify this is by paying off your second loan first, or combine both loans into a larger first mortgage. If this is not an option, talk to the lender of your second loan and see if they are willing to stay in the second position behind your first lender (their compliance will determine if you can refinance).
So after answering those questions, does refinancing your mortgage still sound worthwhile to you? If you are still uncertain of what you should do, reach out to us at John Antle Mortgages. Weighing out all your options first is important for you to make the right choice. Don’t feel pressured to rush into anything just because you might run out of time because making a smart financial decision should come first.
Want to talk about refinancing your mortgage? Contact us today.
JOHN ANTLE MORTGAGES – KELOWNA’S MORTGAGE SPECIALIST
We specialise in offering mortgage solutions that go ‘above and ‘beyond the bank’. This means we are able to provide flexible solutions at great rates, in fact our rates are often better than what traditional banks have to offer. The bank can be intimidating and even frustrating, while working with a mortgage broker opens up your options and allows you to find solutions for your unique situation. We work with a variety clients including first-time buyers, those looking to transition from renting to owning, self-employed business people, as well as investors in rental and/or vacation properties.