You will find that your current mortgage isn’t always set in stone. One of the changes you may make is refinancing the mortgage. When you do so, the previous mortgage terms and conditions will no longer exist. You have the option of refinancing with the same lender or with a new lender. If you go with a new lender, they will pay off what you owe to the previous lender.
Is it a Good Idea?
There can be some controversy in place about refinancing. There are pros and cons for it. There are times when it can be a good idea. For example, when the interest rate has dropped at least 1% and you plan to stay in the home for many years. This lower interest rate can save you lots of interest in the long run.
Perhaps you are struggling to keep up with your current mortgage payment due to reduced income. By refinancing, you may be able to lower that monthly payment enough to it to where you are able to fit it into your budget successfully once again.
If you have a variable rate mortgage, there is always the risk that the interest rate is going to increase. Maybe you have decided to refinance the loan on the home to a fixed rate that is going to be predictable for the long term.
If you are comfortable with your current payment, you may still be able to find some value with refinancing. If your loan is relatively new, you still owe plenty of years on it. By staying with the same payment but a lower rate of interest, you can actually cut several years off the end of your home loan. This is an easy way to pay it off faster without much effort at all and no more money involved.
Sometimes, refinancing is a good choice if you need to borrow against the equity in your home. You can use the funds for upgrading your home, for paying off bills, and for anything else that you want including a vacation. Just make sure you can keep up with the payments when you refinance.
Where some people get into trouble though is that they refinance their mortgage and then they overspend. For example, they pay off debts such as credit cards with the money they get. Then they start to charge up those cards again. This means they no longer have equity in the home and they now still owe those credit card bills once again. This is definitely a scenario to avoid.
What is Involved?
If the decision is made to refinance the mortgage, there is a great deal of paperwork involved. First, you need to decide if you will work with a bank loan officer or a mortgage broker. Evaluate what each can offer you regarding the terms. You may need to get an appraisal for your home too. Refinancing can only be done if the home is worth what you will owe on it. Around Canada, that usually isn’t a problem as home continue to increase in value.
For a bank to refinance the home, the borrowers will need to have good credit. Even with good credit, their income to debt ration can be too high to qualify. A mortgage broker may be able to connect that borrower with a lender that offers decent rates and they can do the approval without all of the stringent requirements of a bank loan.