This post will cover the refinancing process and provide the reader with tips and guidelines regarding the best ways to secure a favorable refinancing deal.
Refinancing your mortgage is not a decision to be taken into lightly. It can be a long process with added costs that could cost you more in the long run. With proper research, you can make an informed decision to decide if refinancing is right for you based on your assets, debts and other factors. There are a few questions you need to ask yourself.
What am I worth?
First, find out what sort of equity you have in your home. You’ll need to get a current appraisal to know what your home is now worth. Don’t just go by what homes are listed at on realtor.ca, as listing prices are not the same as selling prices. Many agents will offer a free appraisal of your home to get a current value. Once you get the value, subtract what’s left on the mortgage from the home’s value to get the amount of the equity. Remember that if you sell, there are costs associated with it, so the equity amount is not the amount that you can put in your pocket after a sale. As well, take stock of other investments you may have, including vehicles, RRSPs and stocks.
What is the reason I am refinancing?
Do you need to refinance your home mortgage to pay off debt that has gotten out of control? Do you need access to your equity to buy something? Maybe you are only interested in refinancing because the interest rate you currently have on your mortgage is quite a bit higher than the current low rates. Some people get fed up with their lenders and just want out, lured by deals at other lenders, which might make this decision an emotional one and not a practical one. Refinancing could be the only way to get your dream kitchen. Decide on the reason for refinancing so you can discover if the end benefit is worth it.
What will it cost me?
There will be penalties on a refinance and you’ll have to read your mortgage agreement to figure out what these are. Prepayment charges vary from a few hundred dollars to the value of the interest left to be paid during the term. If you are staying with the same lender, you may be able to negotiate these fees, but consider them wasted money if you are changing lenders. There are also usually fees that apply like application and appraisal fees, which can cost hundreds of dollars and go directly to the lender, never to be seen again.
These fees and charges may be worth it in the long run if:
1) Your interest rate is significantly lower and will save you more money than if you had kept the interest rate the same.
2) Your debt payments are so high that you are only paying interest.
3) The interest rates on your household debts are so high that you’ll end up paying more to that interest in the few years it takes you pay it off than you will on your mortgage over the term.
4) The renovations you’ll be doing on your home with the equity will significantly increase the value of the home.
How do I decide?
Basically, you’ll need to get out the calculator and calculate the long-term impact of both what refinancing will cost you and what you will gain. If the gain number is quite a bit higher, refinancing is probably a good idea financially. If the losses will be higher with a refinance, but you feel there is no way out of debt or pay for college or those renovations, you will have to decide with your head and put your emotions on the back burner.
If you’ve got questions about refinancing or are looking for a home appraisal before your refinance, feel free to contact me.