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How to Decide Whether It’s Time to Find a New Lender or Refinance Your Mortgage
Because they are so similar in concept, the terms “refinancing” and “mortgage switch” are often viewed as interchangeable. However, when making important financial decisions concerning your home, it’s important to be confident that you understand the difference between the two – especially when deciding whether or not you want to stick with your current lender.
This article will help demystify the subtle differences between a refinance and a mortgage switch, so you can be confident in your decision about which option is right for you and you financial situation.
What is a Mortgage Refinance?
With so much conflicting information circulating the web, it can be difficult to separate fact from fiction when it comes to refinancing. This can make it seem daunting, but in some cases, refinancing can actually be the better choice.
To put it simply, refinancing is when you take out a new mortgage to replace your current one. It can either be for the same amount or for more money, and is often used to negotiate better mortgage rates and terms. Some borrowers may refer to this as a remortgage. You may also remortgage to raise capital, pay off your mortgage more quickly, reduce your monthly payments, or consolidate more expensive high-interest debts.
Contrary to popular belief, you can choose to refinance with either a new lender or stay with your current one. Refinancing with a new lender can be done without penalty if you are at the end of your current mortgage term.
When you refinance your home, the terms and amount of your mortgage will change. There are often legal fees associated with refinancing, but some lenders will be open to paying for these costs.
Pros and Cons: When & Why to Choose Refinancing
Although, in many cases, refinancing can save you a ton of money and free up more monthly cash flow, as with any financial decision, there is still room for error. However, if you go in well-informed, refinancing can have many benefits. There are many reasons people decide to remortgage, and each one has its own pros and cons.
Lower Monthly Payments
Refinancing to reduce monthly payments can be done by extending the amortization remaining to as much as 30 years. This will reduce your monthly payment obligation. On the other hand, it will take you longer to pay off your mortgage, so keep in mind that you can extend your amortization to 30 years, benefit from the lowest payments possible, and then make lump sum payments throughout the year when you have additional funds.
Lower Interest Rate
If rates improve after your mortgage has funded, you can break your current mortgage contract in order get a new, lower interest rate. It is important to remember that breaking a mortgage contract will come with mortgage penalties. Therefore, it’s best to speak with a mortgage broker to see if you end up saving money by the end of your term.
Switching to A Fixed Rate
If your original loan was an Adjustable-Rate Mortgage (ARM), you may decide you’d rather the reliability and dependability of a fixed rate. This is a common reason for refinancing, as it protects you from future spikes in interest rates. It’s also easier to plan and budget for. However, on the other hand, if interest rates drop you won’t be able to take advantage of them without refinancing again.
What is A Mortgage Switch?
A mortgage switch, or a transfer mortgage, involves moving your current mortgage from one lender to another. While all the terms of your mortgage are reset when you refinance, with a mortgage switch, the only things that change are your term and interest rate. This is ideal for when you want to take advantage of lower interest rates in the market (or are just not happy with your current lender) but are not interested in changing any other terms of your mortgage.
If you break your mortgage, there will likely be a penalty. However, oftentimes the savings you’ll get by switching to a lender with better rates will more than make up for it. You can completely avoid this penalty by making the switch at the end of your mortgage term. In most cases, the new lender will cover the cost of legal fees. If you are lucky, they might even cover the cost of the appraisal if one is required.
Pros and Cons: When & Why to Switch Mortgages
For many people, switching mortgages seems like the easiest and most convenient option. While there could be many reasons someone will decide to switch their mortgage, there are two primary scenarios in which it would make the most sense to switch providers.
Lower Mortgage Rate
If switching to another lender can offer you a lower mortgage rate, you could potentially avoid thousands of dollars in interest charges over the duration of your loan period.
Better Terms and Conditions
If another lender can offer you better terms and conditions – especially when it comes to prepayment options – it may be worth switching your mortgage. This could help you pay down your mortgage more quickly and save you from having to pay additional interest costs in the long run. The number of times per year that you can adjust your monthly payment amount also varies between lenders, so you may decide to switch to someone that offers more flexibility.
The Bottom Line
Whether you choose to refinance your mortgage or switch to a new lender ultimately depends entirely on your personal financial situation. If you’re thinking about switching your mortgage, you may benefit from being open and honest with your lender about the fact that you’re shopping around – after all, there is always room to renegotiate.
If you’re still having trouble deciding, you can always contact us. We’d be happy to discuss your options!
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.