What every home owner should know about Refinancing…

What every home owner should know about Refinancing…

Surrounded by a sea of Refinancing confusion!

There are probably many “lifesaving” tips people have thrown you to help determine the right time to refinance your home. You may have heard that the interest rate on the new loan must be at least two percent less than the old loan, or it is not a good decision. Another frequently quoted, but just as frequently incorrect statement, is that if your loan is less than two years old, your shouldn’t refinance it now.

Neither one of these statements is entirely correct, and it can be extremely difficult to receive unbiased and accurate information about the refinancing decision and process. It is our desire to offer you a clear, concise guide to help you get rescued from that sea of refinancing confusion.

When should I refinance my home mortgage?

Put very simply, the decision to refinance a home should be based on whether you will own the property long enough to recapture the expense connected with the new loan and the overall effect lower payments will have on your household budget. The way to figure this can be as easy as subtracting the proposed new overall payments from the existing overall payments to find out what the monthly saving will be. Then, divide the monthly saving into the cost of refinancing to determine how many months it will take to recapture that cost.

There are some situations in which a refinancing decision should invariably be made. If you are able to negotiate a “no-cost” mortgage (you pay no penalty or closing costs), and if the new mortgage rate is lower than your existing rate, than refinancing your loan would certainly be of financial benefit to you.

If the remaining mortgage balance, including penalty and closing costs, can be refinanced at a reduced monthly payment, and still be paid off within your existing mortgage payment term, then refinancing would be highly advisable. If you need extra cash for a home equity or auto loan, and the mortgage rate is lower than alternative loan rates, then refinancing is probably the best choice.

Lastly, you can generally count on it being time to refinance when your new mortgage rate is at least one to two points lower than your existing rate, and you plan on staying in your home for at least three to five years.

What Refinancing Myths Do I Need to Watch Out For?

1.  Blending your existing rate with your current lender!

This is the most common technique all lenders will try on you. They hope you do not know how to compare what this means and that you will not shop around. HUGE MISTAKE! Sometimes blending is in your favor, and if it is, we will tell you that. However, more often than not, it is not in your favor, and a new mortgage rate will save you thousands of dollars in interest costs!

2.  One widespread myth that needs to be dispelled is the idea that lowered monthly payments are the financial yardsticks that wise financing is measured by. Monthly payments are only comparable if they are based on the same loan duration! In fact, lowered monthly payments are can be achieved even at a higher mortgage rate, if the new mortgage has a longer term than the remaining years of the old mortgage.

3.  Another common misconception about refinancing is that if the new rate is not at least two points lower than your existing mortgage rate, then refinancing is not worth the time and trouble. In many cases, especially if you are planning to stay in your home at least three to five years, even a one-point reduction can make an enormous difference in your overall home mortgage cost. In addition, with the constant technological advances in the mortgage industry, obtaining a mortgage loan r refinance is now faster and easier than ever before.

What Exactly Do I Need To Consider About Refinancing My Home?

To accurately sum up your refinancing decision, you need to thoroughly consider the following six factors:

1. The amount of reduction in the mortgage interest rate.
2. The amount of reduction in the monthly payment.
3. Any prepayment penalties on the old mortgage.
4. The amount of closing costs, including any appraisal of CMHC costs, legal fees, etc.
5. The number of years you plan on retaining your home.
6. The effect on your cash flow overall lower payments could make.

What Will Actually Be Involved When I Refinance My Home Mortgage?

When you refinance, the proceeds from your new mortgage loan are used to pay off your old mortgage, bank loans, credit cards or new money for renovations or any other worthwhile purpose. Even if you use the same lender this is true. You are not simply re-negotiating the terms of the old mortgage, such as reducing the interest rate.

You need to expect that your home will have to be appraised again, and possibly inspected. Your credit history and overall financial picture will be reviewed again to make sure you qualify.

Of course money doesn’t grow on trees, but if it is truly the right time for you to refinance, then with they money you will be saving after twelve to eighteen months, you should begin to feel like your money trees are in full bloom!

For more information contact your Toronto Mortgage Broker at 416-920-9931

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