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What Happens If You Refinance Home Loan?

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When you start a new mortgage, either with the same lender or a different one, you are refinancing your old one. Refinancing your mortgage might help you lower your interest rate, access home equity, or consolidate your obligations. Mortgage refinancing is dangerous since there will be a significant pre-payment penalty if you pay off your mortgage early. Do your homework and be sure.

Reasons to Refinance Your Mortgage

Refinancing a mortgage is not always done to obtain a lower interest rate. Mortgage refinancing can also be utilised to consolidate debt and access home equity.

1. Getting an Interest Rate Reduction

Refinancing to achieve a lower interest rate can save you a lot of money over time, depending on the pre-payment penalty and the size of your existing mortgage. Expect to pay a three-month interest penalty if you have a variable rate mortgage and the greater of a three-month interest penalty or an interest rate differential penalty if you have a fixed rate mortgage (IRD). Don’t let penalties discourage you; by studying the figures, you can determine whether refinancing will result in cost savings.

2. Getting Cash out of your Home’s Equity

You might be able to access the equity in your house by refinancing your mortgage. You could have access to up to 80% of the value of your house, less any outstanding debt. That extra cash might be used for financial investments, house improvements, or your kids’ education. You can break your mortgage, take out a home equity line of credit (HELOC), or combine and extend your mortgage with your present lender to access this equity in several ways.

3. Refinancing for Debt Consolidation

If your house has enough value, you might be able to refinance your mortgage and use the equity you’ve built up there to pay off high-interest debt. For instance, you might be able to consolidate your debt through one of the several mortgages refinance choices if you have several unpaid debts, such as a vehicle loan, a line of credit, or credit card bills.

Costs Associated with Mortgage Refinancing

Your plan for accessing equity or lowering your interest rate will determine how much it will cost to refinance your mortgage. Whatever tactic you choose, you will always have to pay legal fees because a lawyer is required to modify the financing on the title. The good news is that many brokers and/or lenders will reimburse this expense if your mortgage balance is higher than $200,000.

Your lender will impose a pre-payment penalty if you terminate your mortgage in the middle of the term to get access to equity or lower your interest rate. This fine for fixed mortgage rates is the greater of three months’ interest or the difference in interest rate payments (IRD). This is simply three months’ interest for variable mortgage rates.

Mortgage Refinance in Canada

If you’ve done your homework, worked the numbers, talked with a mortgage expert, and determined that the loan agreement given to you is valid, you can sign it with complete confidence that you made an informed choice.

Congratulations then! That indicates that you successfully refinanced your home’s mortgage for a valid reason, at a competitive rate, and with favourable terms. All that’s left to do is commit to using the money you obtained from refinancing your house wisely and gradually pay off the loan with your regular monthly payments.

What happens to existing loan when you refinance?

This is referred to as mortgage refinancing, when you use money from a new mortgage loan to pay down an old mortgage loan. The old mortgage is then replaced with the new one, which you gradually pay off.

Refinancing is a choice made by some homeowners to benefit from reduced interest rates or to pay off their debt sooner. Some people refinance in order to use their home equity to fund renovations or other costs.

Time Frame to Refinance Mortgage

The procedure you went through to obtain your initial mortgage is exactly the same as the refinancing procedure. You will submit your paperwork, fill out an application, wait for underwriting and processing, and then close on your loan. The lender you select and the general level of market demand will affect how long the process takes.

For instance, a lender with less business may take longer to process a loan than one dealing with more applications or a sudden increase in demand. A refinanced mortgage took 59 days on average to conclude in January 2021.

Is Refinance Worth it?

You need to have a firm grasp of your finances and long-term objectives to determine whether refinancing your mortgage is worthwhile.

How long will you be staying in the house, first? The “break-even point” is when the money you saved on the refinance outweighs the costs of refinancing, and you want to stay in the house long enough to reach it. Refinancing is probably not the best course of action for your finances if you want to move within the next five years, and it will take you ten years to realise the savings.

Additionally, you must consider your own financial circumstances. Refinancing into a lower rate and longer loan term may be necessary to lessen your monthly payment if money is tight or your income has been reduced.

Take Away

No matter what kind of refinance you’re thinking about, comparing options is crucial. Compare the expenses, mortgage rates, and other terms of the various quotes you receive from lenders. These frequently differ significantly amongst lenders.

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