If you’ve already obtained a mortgage, you know that your monthly payment goes toward covering two things: the principal of the loan (the amount of the loan itself) and the interest rate applied to the loan. In fixed-rate mortgages, a homeowner is locked into a set interest rate that doesn’t change over the term of the mortgage. It is possible to get a different mortgage at a different rate after the expiration of your current mortgage, but many homeowners feel that they cannot wait that long.
Alternatively, they may be paying attention to the market and the fluctuation of interest rates on the housing market. If interest rates have declined since the first mortgage was established, a homeowner may choose to refinance while interest rates are low. When interest rates are low, that gives the homeowner the choice to either make smaller monthly payments or continue making the larger payments as to further chip away at the principal on their loan.
One big benefit of refinancing your mortgage, aside from obtaining a new mortgage at a potentially lower interest rate, is that it grants you access to your home’s equity. The money that you acquire from a cash-out refinancing arrangement can be used in any way that you see fit.
Second mortgages also grant homeowners the ability to tap into their home’s equity, but these loans are far riskier and come with a lot of additional expense. One of the greater expenses, aside from the principal of the equity loan, is the interest rate. Interest rates on second mortgages tend to be higher than the rate on one’s first mortgage, but both interest rates must be paid monthly in order to prevent default.
Refinancing doesn’t come without expense. Depending on if you’re refinancing during your mortgage’s term or at the end of it, there are different fees and penalties that need to be paid.
If you break your mortgage before it is up for renewal, a prepayment penalty must be paid. This amount will be the larger amount between either three months of interest payments or the mortgage’s interest rate differential.
A mortgage discharge fee is only applicable when you are switching lenders in the process of refinancing. To discharge yourself from the previous lender, a discharge fee of around $300 will be billed to you.
Since mortgage refinancing entails the production of a new mortgage with new terms, the new mortgage must be registered. This fee is governed by province and is usually less than $100.
You will need to hire a real estate lawyer to handle matters relating to the refinancing process. This will cost around $1,000 but pays for the time that your lawyer will spend handling the communications between you and your lender.
Refinancing a mortgage can be the smartest way to access the equity of your home, but only under circumstances like those outlined above. If you are striving to save money on your monthly payments, get the money needed to make major purchases or debt consolidation or pay off your mortgage quicker, refinancing could be the right choice for your unique situation.