If you are looking to buy yourself a home, getting a preliminary mortgage evaluation is the best decision to take. Through this process, you can know how much you can afford and what the mortgage payments are with several purchasing costs. A major advantage of getting an early evaluation is that you are safe from possible rate increases.
This is because a pre-approval ensures a fixed rate for a specified period. You are also not under any responsibility to report to the mortgage broker or the bank. There is no particular disadvantage to this, which indicates that it is the right precautionary step to take when buying property.
Quick Read:
- Why Refinance Your Mortgage?
- How to Refinance Your Mortgage?
- How Much Does It Cost?
- Save More with These Tips on Refinancing Your Mortgage
- Example-Remortgaging for Renovating
- Which Mortgage Period Is The Best In This Scenario?
- Which Type of Amortization is Better?
- Recommended Mortgage Characteristics
- The Most Common Blunder Made By Most Refinancers
Why Refinance Your Mortgage?
Here are some of the reasons why you should consider refinancing your mortgage:-
1) For Debt Consolidation
If you have sufficient cash at home, then you can make use of various refinancing options to settle high-interest debts. This is applicable if you have numerous outstanding debts including credit card bills, car loans or exceeded credit limits. In this case, you can merge all of your debts and pay through refinancing.
2) Benefit from Low-Interest Rates
Canceling your contract in case of a low-interest rate can be a wise thing to do. You can save some valuable cash depending on how big your mortgage is. This also depends on the penalty you might have to pay after cancellation. If you are in a variable mortgage plan, a three-month interest amount is to be your penalty for breaking contract. In the case of fixed rate mortgages, you will either pay the interest rate differential penalty (IRD) or larger than three month’s interest amount.
3) For accessing equity (money) in your home
Refinancing mortgages has a lot of perks. For instance, you can gain up to 80% of your home’s value excluding any outstanding mortgages. You can use the additional cash for investment plans, your child’s education costs and modernize your home as well. One of the easiest ways of gaining access to such equity is by canceling your contract. Another way is through taking a home equity line of credit (HELOC). You can also gain access to such equity by mixing up and extending your mortgage amount with the present lender.
How to Refinance Your Mortgage?
Here are the three simplest ways by which you can refinance your mortgage:-
1) Making use of HELOC
One of the best things about HELOC is that you can access the equity at your home by your own judgment. Moreover, you should only be concerned with the interest payments made on your outstanding balance. For adding HELOC, you will have to contact your current lender and a small group of other lenders as well.
2) Mixing Up and Lengthening Your Present Mortgage
Your lender may charge you a mixed up interest rate consisting of the old and the latest rate. This rate will also include any further money you will borrow as well. It is important to know that blended rates are usually higher as compared to other mortgage rates. You should differentiate between your savings and the blended rates if you decide to cancel your contract.
3) Breaking your Contract before Time
This usually happens when there is a lower interest rate or if you want access to the equity at your home. The process basically consists of abolishing your present mortgage and getting a new one with a different lender.
How Much Does It Cost?
This cost depends on what method you use for lowering your interest rate or gaining access to equity at home. You will have to be aware of the additional legal expenses in the process that will include lawyer services as well. However, if you have a mortgage amount exceeding $200,000, the lender or broker will cover the costs.
In case you cancel your contract in the middle of the specified period, you may have to pay a forestallment penalty. For a variable rate plan, this is only a three-month interest amount. In the case of a fixed rate mortgage, this will be greater than the three-month interest amount. You also have the option of paying the IRD as a penalty in fixed-rate mortgages.
Save More with These Tips on Refinancing Your Mortgage
Sometimes, remortgaging can be a big burden on your pockets. This is because it can involve certain penalties in case of violation of the plan. Another downside to this is that if you chose the wrong plan, you might pay more than you expected to.
According to different statistics, about one in every six individuals will decide to refinance this year. There is also a high probability that these individuals will select an incorrect mortgage plan which is quite worrying.
To resolve this, these individuals will require professional advice. We have tested some of the very best mortgage consultants. We have asked the chosen advisers for proper recommendations concerning different situations. If you want to remortgage the right way, read on to know the best tips to help you save some cash.
Example-Remortgaging for Renovating
Imagine a family consisting of a husband, his wife and two kids only. The 45-year-old married couple is planning to renovate their inhabited home. For the past three years, the husband is providing self-employed income to the house. The wife is a stay-at-home mother. The family is financially capable of handling large interest loans. They have savings worth $100,000 with huge credit and a regular debt pack. The mortgage term has 15 years remaining as they look for refinancing options with a balance of $75,000.
Other details include a home value that is equal to $1 million and the amount before refinancing which is $600,000.
Which Mortgage Period Is The Best In This Scenario?
Sarah Taylor says that a variable interest rate is the best option in this case. This is because the individuals can benefit from lower interest rates. Furthermore, you can set the required payments over the specified interest rates. From this, you can ensure that the paying back process observes the contract regulations.
Tip: if you use Variable Rate Mortgages, you won’t have to pay more in case of changes in the prime rate. In the case of a bendable mortgage rate, there’s a possibility that a change in prime rate can affect the payments as well.
According to Shelley Jobb, in this case, a mixture of mortgage and line of credit is a wise solution. The family should specify the mortgage at $675,000 and store the rest of the equity in the line of credit. This is a precautionary measure as homeowners are often wrong in estimating renovation costs.
Tip: Such a scenario can have negative results. The family can look towards variable rate mortgages as they have proven to be the better option for quite a long time. They can accommodate major cost instability due to a plentiful room on their debt ratios.
According to Dustan, every business owners has numerous challenges. In this case, the HELOC is a better option with a security charge.
Tip: A security charge is a very useful tool for entrepreneurs. It has no legal costs but it can cost more than normal charges in case of changing lenders. It is better to proceed with a variable rate mortgage plan as life is highly unpredictable.
Which Type of Amortization is Better?
According to Dustan, the amortization period should be of 30 years. This is to provide the family with low payment incentives if their business goes down. The next step would be to benefit from the lender’s forestallment concessions to make up a monthly automatic single-payment forestallment arrangement. From this, the family can limit the pay-off period back to 15 years.
The solution for this according to Shelley is that to reduce the debt ratio for a longer pay-back period. The period is stretchable up to 30 years according to the contractor’s regulations. If the family doesn’t want a larger amortization period, then 25 years would be a better choice.
Tip: some lenders let you make double payments. This is to reduce your amortization period. Such examples include TD Canada Trust, CIBC, London Life, National Bank, Desjardins, Scotia Bank etc.
Recommended Mortgage Characteristics
According to Sarah Taylor, the changes in mortgages take place within the term period. In the family’s scenario, you should ask the lender a few questions. These include asking for the availability of refinancing options, a possibility of ported and blended rates and early renewals.
Tip: a blended rate means that you keep the current rate according to the old money and add fresh money to the present rates. Porting your rates means that you shift the mortgage to a new property without paying any penalties.
According to Shelley, a security charge is a much better option in terms of home renovations. The charge is also usable for property investment purposes. If the family’s business slows down, they can always borrow from the line of credit in case of an emergency.
If they change their lenders every 5 years, the security charges option doesn’t apply well. In this case, a variable mortgage rate is a better solution.
The Most Common Blunder Made By Most Refinancers
According to Sarah, it is necessary to keep a regular check on the changes occurring in prime rates. An improper evaluation of marketing conditions is the most common mistake made by refinancers. Forgetting to lock when the rates go up is also a common mistake amongst many refinancers.
Tip: in case your mortgage rate flows with the prime rate, most contractors let you lock into a permanent rate. Some of these lenders might also make you convert your plan into a three-year term or even longer in some cases.
According to Dustan, the biggest mistake committed by most refinancers is that they do not plan early for negative outcomes. It is important to look for longer amortization periods for future low payment options. In this scenario, by following the right steps, the family will have enough for future investments in case of any financial trouble.
Once you follow the guide, you can easily get over the complications and confusions involved in Refinancing mortgages. Feel free to contact us if you have any further questions.
