When should you contemplate a refinance?
I recently had a call with a client whose mortgage was up for renewal. She told me her bank had offered to add a line of credit on to her mortgage. I asked her if that was something she wanted. She didn’t know.
The dizzying amount of options that come with choosing a mortgage, (which lender? what kind of rate? term length?) don’t automatically diminish once you get through the initial financing process. Even on renewal, there are decisions to be made. One of which is, now that you will be starting a new product, do you want to take any equity out of your home? How would you know if that’s the right decision?
Before I answer those questions (and more!), let’s get back to basics for a sec.
What’s a renewal? What’s a refinance?
Five years ago, you bought a house. You signed a million pieces of paper and were given some keys. You diligently paid your mortgage. And now, your term is up, and it’s time to re-negotiate your mortgage. You have options!
Option 1: Renew or Switch
Your focus has been paying your mortgage at the required rate, or maybe you were even able to make some additional payments to bring your mortgage balance down. You don’t have a need for additional financing, you just want to keep paying down this mortgage until you own your house. You are looking to renew or switch!
A renewal notice will be sent to you by your existing lender, and if you are with a big bank, they may even call you in for a meeting to discuss. Renewing with your existing lender is easy, as you will not have to re-qualify. However, every homeowner should take the decision, and opportunity!, to reassess their mortgage seriously. It is in your best interest to understand your options and make an informed decision.
When deciding whether to stay with your existing lender or take your business elsewhere, consider the following;
What rate has your lender offered you on renewal? Is it competitive?Have you had a great experience with this lender or have they fallen short?Are there elements that you could get with a new lender that you’d like to have? For instance, better pre-payment privileges. How do the penalties vary should you need to leave your mortgage early?
Many lenders have programs to gain new clients where they will cover some or all of the costs to switch. Your mortgage agent will know which lenders these are.
Important to keep in mind that a switch will require some effort, as you are introducing yourself to a new lender, so your mortgage agent will be asking you for proof of income (job letter, pay stubs or tax returns), as well as a recent mortgage statement and property tax bill. Your agent will do the legwork for you, but you will be part of the process!
Option 2: Refinance
A refinance is the process of taking additional equity out of your home. This is done once you’ve owned your house for at least a year (there are no refinances within the first year of home ownership), for a couple of reasons; 1. You’ve been paying down your mortgage, meaning you own more of your house than you did at the outset of your term and 2. Your home has (hopefully) increased in value. These two forces combined mean that you have equity that you can access in your home. It’s sort of like you are selling your house, to yourself.
You can refinance up to 80% of the value of your home, provided that you qualify. You must qualify!!! Your income has to be enough to carry the new level of debt that you want to take on, and you will be stress-tested.
Why would someone choose to refinance? Typically, there are three reasons:
A refinance to consolidate debts. If a person has amassed significant unsecured debts, in a refinance, these can be rolled into the mortgage, the benefit being that all the debts are put together under one interest rate and one payment.
For renovations. If you’ve been waiting for that new kitchen or finished basement, or you’ve been holding off on getting a new roof, the time that you are renegotiating your mortgage is the ideal time. You will not pay a penalty so long as you do not leave your mortgage early, and you are in the process of shopping around anyhow. The additional funds you need are built into your new mortgage, and you can use them to improve your home.
Purchasing an investment property. Some people choose to take equity out of their property and use it as a down payment on their next one.
Each of these can be explained in much more depth, but the critical thing is this: if you are thinking about any of these, you are thinking about a refinance.
A good mortgage agent is going to ask the right questions and listen to your answers. They are going to provide you options, and the knowledge to make an informed decision.
Personalized, unbiased guidance is so important when it comes to a major investment like your home. Reach out to me anytime! I’m here to help.
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