Mortgage Refinancing 101
Understanding the Refinancing Process with Help from a Mortgage Broker
We’ve already talked about the best time to refinance your mortgage. Now it’s time to take a closer look at the “how,” as well as what refinancing is and what it entails.
So, what’s the process? How does it work? And why is it important to work with a mortgage broker throughout?
Why Are You Refinancing?
Before you refinance your mortgage, though, you must determine why you want to refinance.
Common reasons for refinancing include:
- Lowering your monthly mortgage payments. Who wouldn’t want to lower monthly payments? This is one of the most common reasons for refinancing a mortgage. We have helped dozens of borrowers lower their mortgage interest rate and payments this year to help with their monthly cash flow.
- Accessing your home equity. As time goes by, your home builds equity or value. Refinancing a mortgage can help you access home equity, essentially taking money out to fund large purchases or expenses. Homeowners often do this to pay for home renovations, or to help their kids with college and university tuition. You can also use your home equity in order to make a down payment on a vacation home or investment property.
- Consolidating debt. If you have high-interest debt, you may be able to consolidate this with a refinanced mortgage, as long as you have enough equity in your home.
If all this sounded like a completely foreign language and you’re not sure where to start, don’t worry! A mortgage broker can help you shop for the best terms and rates when refinancing your mortgage.
Let’s take a closer look:
How Do You Refinance Your House?
There are three common ways to refinance your home’s mortgage:
Break Your Existing Mortgage Contract
You may wish to break your mortgage contract early to take advantage of lower interest rates with a new mortgage, or to access your home equity. There are usually costs for doing this, so you’ll have to weigh the costs and savings that come with changing mortgages.
Add a Home Equity Line of Credit (HELOC)
Your lender may give you access to a home equity line of credit. Like a regular line of credit from a lender, you can access your home equity as you please. You are responsible for paying monthly interest payments on the outstanding balance. The maximum you can borrow is 80% of the value of the home.
Add a second mortgage
This is usually used for large investments, like renovations, tuition, and debt consolidation. You can add a second mortgage component. Some lenders might go up to 95% of the value of the home. However, most lenders will allow you to access up to 85% of the value of your home.
What Documents Are Needed to Refinance A Home Mortgage?
Your mortgage broker will provide you with a detailed list of the required documents. You will typically need financial documents related to your existing mortgage, your home, your income, and any other assets and debts.
How Does Refinancing Work?
Step 1: Determine Your Reason for Refinancing Your Mortgage
So why are you looking to refinance your mortgage? Your reasons for refinancing can influence your process and what you’ll need to look for.
Step 2: Check Your Credit Score
Your mortgage broker can check your credit score for you and help you find the best mortgage terms and interest rates based on your score. Remember that checking your credit score too often can actually have a negative impact on your credit score. If you’re serious about refinancing, get your ducks in order ahead of time.
Step 3: Estimate Your Home’s Value
What is your home worth? If you’ve steadily invested in upgrading and maintaining your property, then you may actually see an increase in your home’s value compared to what you paid for it. A professional appraiser can give you an accurate market estimate of your home’s worth, but it’s also worthwhile to do some basic research and check out recent sales and listings in your neighbourhood. This can give you a good ballpark of what your home is worth.
Step 4: Shop for the Best Mortgage Rates
This is where working with a mortgage broker is an absolute must! Brokers work with a wide variety of lenders, which makes them indispensable when trying to find a new rate. A broker can help you shop around and find a rate that suits your needs.
Step 5: Managing Fees and Costs
Before deciding on a mortgage refinance, make sure you are aware of any fees and costs. Your mortgage broker will outline any costs to you so you aren’t surprised. Common fees might include:
- Prepayment costs for breaking a mortgage early (Minimum penalty is equal to three months’ interest)
- Appraisal fees
- Legal fees
- Closing costs (more on this later)
Step 6: Gather Your Paperwork
You will need to provide paperwork to your lender, similar to the paperwork you needed to apply for a mortgage when you first purchased a home. For example, this includes proof of income (e.g. pay stubs, notice of assessments, and financial statements).
Step 7: Lock In Your New Mortgage Rate
Once you’ve found a suitable mortgage rate with your mortgage broker, the file will be submitted to a lender for a mortgage approval. Once approved, it means the mortgage interest rate will be locked in. If rates rise prior to the refinance date, this will not impact you. If rates drop prior to your funding date, then the broker can lower your interest to the new rates available.
Step 8: Set Aside Closing Costs
You may have to pay closing costs so set aside extra money to cover these costs. However, in many cases, lenders have promotions where they will cover legal fees and appraisals costs for you!
How Much Equity Can You Take Out of Your Home?
To figure out how much home equity you can take out, you must first determine how much home equity you have. This is usually calculated by taking the market value of your home and subtracting what you still owe for your mortgage.
The current market value of your home is the amount it would likely sell for if you were to sell it today. To determine an accurate home value, a professional appraiser will visit your home.
Once your home has been appraised, take the market value and subtract the balance of your existing mortgage. If your home’s market value was appraised at $250,000 and your mortgage balance owing is $150,000, your home equity would be $100,000.
When refinancing your mortgage, you can borrow up to 80% of the current market value of your home.
How Long Does It Take to Build Up Equity In Your House?
The time it takes to build equity in your house depends on several factors, such as your monthly mortgage payments, your mortgage interest rates, and the housing market.
Every time you make a monthly mortgage payment, some of that payment goes toward the principal loan amount, building equity as you go. And when you have low interest rates, more of that payment goes toward the equity in your home.
Also, when your home’s value increases, so does your equity.
For example, consider the home value above. Now, imagine your home value increased to $300,000, and you still owed $150,000 on your mortgage.
The difference between the market value and the balance owing is now $150,000, so your home equity increased with your home’s market value.
For help navigating through the mortgage refinancing process, consider working with a mortgage broker.
With their help and expertise, refinancing your home can open up investment and savings opportunities for you and help make your life easier.
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.