The Truth About Mortgage Refinancing
Despite some of the commonly believed myths floating around, refinancing isn’t a bad word. While it can be an intricate subject to wrap your head around, when dealing with the right professionals, mortgage refinancing can actually be a positive experience.
The important thing is to have a solid understanding of the benefits of mortgage refinancing, and to work with a mortgage broker to find the best mortgage product available.
But first, keep reading to learn more about how beneficial refinancing can be for homeowners.
10 Refinancing Myths Debunked
- It Should Be Your Last Resort
A common misconception about refinancing is that you should only do so if you need credit and you can’t access it in any other way. But refinancing offers many other benefits, aside from having access to more credit.
Refinancing—or remortgaging—lets you replace your existing mortgage with a new one to take advantage of:
- Better interest rates
- Flexible mortgage payment terms—e.g. increase your monthly payment amount to pay off your mortgage faster
- Switching from an interest-only mortgage to a repayment mortgage
- It Will Increase Your Debts
You don’t have to take on more debt when remortgaging. You can keep the same mortgage amount you have now and remortgage for a better deal. And if you do decide to take on more debt, refinancing can help you pay off your other debts faster.
Homeowners often replace their existing mortgage with one that has better terms and lower interest rates, fees, and monthly payments to free up their monthly income. This is one way remortgaging can help pay off debts faster.
The other way is by consolidating high-interest debts with a remortgage. While you will be taking on more debt to pay off your high-interest debt, you will save more money by eliminating these high-interest debts. And instead of paying interest on these debts, you can make single monthly payments toward paying down your mortgage.
- It’s All About the Interest Rate
While switching to a mortgage with a low interest rate is one of the top benefits of refinancing, it’s not the only thing to consider. Refinancing comes at a cost. And you have to decide if the costs outweigh the savings from a lower interest rate.
If you break your mortgage contract before the term is up, you will have to pay your existing lender an exit fee and an early repayment fee.
The exit fee is an administrative fee for forwarding the title deed to your property. And the early repayment fee—which is typically 2% to 5% of your outstanding balance—is how your lender will make up for the lost earnings of ending your contract early.
When refinancing, you may also have to pay fees to your new lender, along with legal fees, property valuation fees, and other administrative costs.
- It’s Complicated
Refinancing is actually a very straightforward process and takes about two to three months to complete. First, you’ll want to ask your current lender if they can offer you any new deals. And if so, compare their deals with those of other lenders and check the fees that apply to help you decide if it’s worth refinancing.
Once you’ve decided, you can apply for a new mortgage. During the application, the lender will look at your credit history and assess whether you can afford the mortgage. And if your application is approved, the lender will make arrangements to repay the old mortgage and transfer your title deed.
- You Can’t Remortgage If You Have Bad Credit
Though you will likely have trouble qualifying for the best available deals, it is still possible to refinance with bad credit. Your lender will likely want to charge a higher interest rate to offset the risk if you have bad credit. But it is still possible to negotiate a deal.
To get ahead and build your credit in the meantime, check your credit report online, see what’s hurting your credit, report any errors to the credit bureau, and work toward rebuilding your credit. Pay bills in full and on time and start paying down debts.
Also, consider working with a mortgage broker to help you find lenders who are more likely to accept your mortgage application even with bad credit. Having a loan application rejected by lenders can hurt your credit, so it’s better to be safe and work with a mortgage broker to avoid this.
If you do refinance, you can rebuild your credit by paying off high-interest debt and eventually qualify for better mortgage products once your credit is in good shape.
- It’s Too Much of a Hassle for Little Savings
Though remortgaging with a new lender is a bit more complex than staying with your current lender, the benefits of remortgaging often outweigh the costs significantly. And to make remortgaging even less of a hassle, you can work with a mortgage broker who will do all the work for you.
Mortgage brokers look for the best deals available for your specific financial situation, so you can save more money without any hassle.
- You Should Only Remortgage If You Need Money
While remortgaging is a great option if you need access to extra cash, you don’t have to borrow extra money when you remortgage. Many homeowners choose to remortgage to save money with lower interest rates. And others choose to remortgage to change their mortgage terms and pay off their mortgages faster.
- Fees Negate Your New Rate Savings
The savings you will make with your new interest rate often cover remortgaging fees. So it’s worth looking into the fees and savings to see how much you will actually save in the long run. And if you work with a mortgage broker, they can help you find the best deals (and even deals that cover the legal fees) to optimize your cost savings when remortgaging.
- You Can Only Remortgage with the Same Lender
Even if your mortgage term isn’t up yet, you can remortgage with any lender. Though you have to pay a penalty fee to break your mortgage with your existing lender, you are not bound to them. So, shop around to find the best mortgage deals. And don’t be afraid to ask your current lender what deals they can offer you.
- You Should Always Remortgage to the Lowest Rate
Often, mortgage products with the lowest rates come with some of the highest fees. So don’t just look at deals with the lowest rates. Look at the overall cost of a remortgage. Will the total costs outweigh the monthly savings from a lower interest rate?
Usually, if you have a large mortgage, the savings outweigh the costs. But be sure to consider all the costs, including the early repayment fee amount to see if it’s worth remortgaging.
You probably shop around for the best deals when making most large purchases and investments. So why should your mortgage be any different?
Refinancing a mortgage can help you save hundreds, if not thousands of dollars in interest. Plus, it can free up cash flow for major purchases and help you become mortgage-free faster.
So, before you dismiss remortgaging, speak with your mortgage broker to find the best deal out there. And remember, it might not be with your current lender.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.