The reasons why you should refinance are endless; however, it’s all about timing and research. Getting these two aspects right the first time can save you money for a family vacation, renovations, a new car, a new speedboat… you get the point. Some might want to refinance to lower their monthly payments, others to consolidate outstanding debt, and others just to find a better mortgage product to suit their needs. It also makes sense to speak to a mortgage broker in Ontario, who can run the numbers for you to determine savings.
Think of it this way; are you the same person you were 5, 10 maybe 15 years ago? If you’re like anyone else, probably not. You may have found a new job or need a change in your mortgage product, from an ARM to a fixed-rate mortgage for example.
There are certain rules to follow so that you don’t end up defaulting or wasting money. The traditional refinancing rule of thumb – wait until you find an interest rate at least 2% lower than what your rate is now. Although it’s usually true it can be inaccurate because in the time you wait for the rates to drop 2%, you could have already spent several thousand dollars on your current mortgage. For some people, as little as 0.5% of a decrease in rates can be enough. The best thing to do here is to really do your research and understand the market as well as possible so that you know when refinancing is best for you.
Another factor when refinancing is your future plans with the home. Generally, some plans such as a balloon mortgage will require a refinance when the period is over. But if refinancing is not mandatory, you could have to wait as long as you stay in the home to refinance. The key thing is to be truthful no matter how much you love your home. Figure out how long you think you will be living at the home. Timing is crucial so understanding when to refinance and when you will start saving money only comes with research. The fact is that refinancing can cost a great amount of money, so you’ll want to be as certain as possible of your situation with for example, if your employer will relocate you to another city, or that you’ll change jobs soon. Do you have a physical condition that would force you to move? Evaluating your situation now and in the future is very important so try not to cut corners on this step.
The next step is to figure out if you need more or less of a mortgage. Most lenders will let you borrow about 80% or more of your home’s appraised value; however, if you’re looking for a ‘cash-out refinance’ it could be lower than 80%.
Now that you know why you may want to refinance, how long you’ll be staying at your home, and how much of a loan you need, we can look at possibly the most difficult part of a mortgage – the closing costs. The closing costs are what you pay out of your pocket to refinance your mortgage. While some closing costs are preset, others are dependent on your local market. Figuring out your closing costs can take some time and effort because they can cost up to $5,000 and will determine how much you save when refinancing.
It makes sense to refinance a home when it will save you money or make paying your monthly bills easier.
According to some experts, you should only refinance if you can reduce your interest rate, shorten the term of your loan, or do both. This advice is not always sound. Certain homeowners may require temporary relief from a lower monthly payment, even if it means refinancing to a 30-year loan. Additionally, refinancing can help you access the equity in your home or eliminate the monthly mortgage insurance premiums associated with an FHA loan.
How Mortgage Refinancing Works
When you refinance, you obtain a new mortgage in order to repay your existing one. Refinancing works similarly to obtaining a mortgage to purchase a home. However, you will be relieved of the stress associated with home buying and moving, and there will be less pressure to close by a certain date. Additionally, if you change your mind, you have until midnight on the third business day following the close of your loan to cancel the transaction.
According to one reputable report, the average time to refinance a conventional mortgage ranged between 38 and 48 days from April 2019 to August 2020. When interest rates fall and a large number of homeowners seek to refinance, lenders become busy and the refinancing process can take longer. Additionally, refinancing an FHA or VA loan can take up to a week longer than refinancing a conventional loan.
When Home Loan Refinancing Makes Sense – Speak to a Mortgage Broker
Refinancing your mortgage can lower your monthly payment by lowering your interest rate or lengthening the term of your loan. Additionally, refinancing can lower your long-term interest costs through a lower mortgage rate, a shorter loan term, or a combination of the two. Additionally, it may assist you in eliminating mortgage insurance.
Closing costs, which include the origination fee, appraisal fee, title insurance fee, and credit report fee, are always a factor in determining whether to refinance. These fees typically range from 2% to 6% of the amount borrowed.
You’ll need to know the loan’s closing costs in order to calculate the break-even point at which the interest rate savings exceed the closing costs. This point can be calculated by dividing your closing costs by the monthly savings associated with your new payment. A mortgage broker would also be able to help you figure out these numbers in a expedited manner.
Obtaining a Reduced Interest Rate
When market interest rates fall, refinancing to obtain a lower rate can result in a lower monthly payment, a lower total interest payment, or a combination of the two.
Another way to reduce your monthly payment is to pay interest on a smaller principal amount, possibly over a longer period of time.
According to government data for the first quarter of 2020, which primarily includes pre-pandemic refinance activity, 55% of borrowers who refinanced maintained their current principal balance or increased it by less than 5% (by financing their closing costs). This is the most frequently used method of refinancing: a rate-and-term refinance.
A higher credit score will enable you to obtain a lower mortgage interest rate. To qualify for the best rates, you must have a credit score of at least 760. According to a government mortgage processor, nearly three in four homeowners who refinanced in April 2020 had a credit score of 750 or higher. Seven hundred and sixty-three percent of consumers had a FICO score of 763 or higher.
Additionally, bringing cash to closing may result in a slightly lower interest rate or the elimination of private mortgage insurance (PMI). 3% of borrowers did so in the first quarter of 2020.
As you may remember from getting your first mortgage, several other services are trying to charge you – appraising your property, researching your title to the property, insurance, credit reports, and inspections for varmints, safety, and structural factors. These services can easily add up to a few thousand dollars and they will save you money in the long run but there are ways in cutting these costs. For example, you can update your title insurance instead of getting a completely new one. Shopping around and comparing as much as possible can also save you money from these fees.
Remember, a mortgage is like buying a vehicle. You wouldn’t run to any car dealership and buy the first car you see, would you? The same goes for a refinance as well, do your research, talk to a lot of different lenders, compare rates, and look into the future of your home.