Things to Watch Out for When Refinancing Your Mortgage
If you find yourself approaching the end of your mortgage term, you have an important decision to make—will you stay with your current lender, mortgage rate, and loan amount, or will you refinance?
While mortgage refinancing isn’t mandatory, doing so can mean securing a better rate and freeing up some cash flow. But before diving in, it’s important to go into this process well informed so you can avoid making some common refinancing mistakes.
What Is Refinancing?
Refinancing—also known as remortgaging—means switching to a new mortgage product that is better for you in some way, often with better interest rates, lower fees, or more flexible repayment terms. This can be done with the existing lender or with a new lender.
Essentially, when refinancing, you will trade your existing mortgage loan for a new loan from a different lender, while also changing the loan amount or amortization.
There are usually fees associate with the process that can range from $496 to $1,800. In addition, the existing lender will charge a discharge fee which the new lender can include in the loan amount. Some lenders will cover these legal fees and some will not.
Why Is It Beneficial?
There are several benefits to mortgage refinancing. Refinancing your mortgage can help you save hundreds if not thousands of dollars and free up more monthly income.
Refinancing can also help you tap into your home equity if you want to pay for home renovations and other large-ticket items. It can even help you to pay down your mortgage faster if you come into extra money—for example, switching from a 30-year loan to a 15-year loan.
Common Refinancing Mistakes To Avoid
While there benefits to refinancing, there are also common mistakes you can make during this time. So to help you find the best mortgage product for you and your financial situation, try to avoid these common refinancing mistakes.
Not Considering a Refinance At All
When you locked in your mortgage rate, it was only for a set number of years. So, once the end of your mortgage rate term is up, your mortgage lender will likely send you an offer or transfer your rate to their higher Standard Variable Rate if you don’t take action.
If you don’t consider refinancing with a new lender or negotiating with your current lender, then you will likely be stuck paying higher interest rates, and may not have the ability to reduce your payment term or tap into equity.
Waiting Until the Very End of Your Term
Waiting until the last minute to refinance your mortgage could end up costing you more. As mentioned above, waiting until your mortgage term is up could get you stuck into paying a higher Standard Variable Rate for a few months until you secure a new mortgage product.
There is legal work involved with switching mortgages that takes time to process. So, to avoid waiting and paying higher rates, plan to refinance several months before your current mortgage term ends. Ideally, you will get in contact with your mortgage broker about six months before your current mortgage deal is up.
Only Considering Your Existing Lender
When your current lender sends you a mortgage offer near the end of your term, it might seem easy to accept and sign the letter. After all, its a common misconception that borrowers must stick with the same lenders. But that is not the case.
In fact, by not looking at other lenders, you could be missing out on better deals that will end up saving you plenty of money.
Not Shopping Around
Another common misconception is that your lender will give you a better deal if you stick with them. But that is not always true. In fact, it is rarely true. So be sure to compare your lender’s quote (including interest, fees, repayment terms, etc.) with those of other lenders.
By not shopping around to see what other lenders have to offer, you won’t be able to compare mortgage products and find the best deal available. In other words, you won’t know if there is a better product out there that could save you hundreds of dollars each month or thousands over the course of your repayment term.
If shopping around seems too time-consuming, enlist the help of a mortgage broker who can do this work for you.
Not Negotiating Fees
If you have good credit and you’ve done comparison shopping, you should try to negotiate with lenders for better deals. Having good credit and knowledge of the offers out there will give you leverage when it’s time to bargain. And to increase your negotiating power even more so, get a mortgage broker to negotiate for you.
Not Considering Future Plans
Do you plan to stay in the same home for the next five years? Or, do you want to sell sooner than later, and perhaps downsize, or find a bigger house to accommodate your growing family?
When agreeing to a mortgage product, you have to consider your current and future plans. Otherwise, you could be stuck with a mortgage that doesn’t fit your life in the next few years. And you could end up having to pay an Early Repayment Charge to break your mortgage, which will depend on the mortgage product you sign up for and how flexible it is.
Shopping for a mortgage product that is flexible and suits your current and future plans could end up saving you lots of money if you do decide to sell sooner than later.
Choosing the Wrong Term
One benefit of refinancing is that you can change the length of your amortization period. Longer amortization periods have lower monthly payments to help free up cash flow, but it will take longer to pay off your mortgage, and you’ll end up paying more in interest over the long run.
On the other hand, shorter amortization leads to higher monthly payments, but you’ll pay off your mortgage faster and save in interest payments overall.
Refinancing to a mortgage with a 30-year amortization can be beneficial if you need to decrease your monthly mortgage payments and free up cash flow. But if you are financially stable and can afford higher mortgage payments, you should consider a shorter amortization—i.e. 10, 15, or 20 years.
The longer your mortgage amortization, the more money you’ll end up paying in interest. So, if you want to save money overall and you can afford a mortgage with a shorter amortization, then opt for one instead of the standard 30-year.
Another option is to maintain a longer amortization but take advantage of pre-payment options like increasing your payments or having the ability to make lump sum payments. Most lenders have such flexible pre-payment privileges that you can pay off the property in less than 5 years if you have the means to do it while maintaining the lower monthly/bi-weekly payments that a 25 to 30-year amortization offers.
Not Keeping Your Credit in Check
If you are not mindful of your credit, and your credit score ends up going down, you may encounter problems when refinancing, such as only qualifying for higher interest rates, delays in the approval process, or being declined altogether.
So, when planning to refinance, check your credit score and avoid applying for new credit, missing payments, making major purchases on credit, and increasing your amount owing, as these can all hurt your credit score and make refinancing more difficult.
Not Working with a Mortgage Broker
While it’s easy to shop for mortgages online, you’re better off working with a mortgage broker when refinancing. Mortgage brokers can find you the best deals for your situation from various lenders. Or, if they work with specific lenders, they can find you exclusive deals. They are also better able to negotiate with lenders so you don’t have to.
A mortgage broker can help you understand all of your available options so you can find the best mortgage product for you, your finances, and your future goals. They can also help you avoid these common mistakes so you won’t be stuck with a mortgage that isn’t in your best interest or doesn’t benefit you to the fullest.
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.