There comes a time for homeowners when they will be required to refinance the mortgage on their property. According to the Canadian Mortgage and Housing Corporation (CMHC), a mortgage refinance is a type of refinancing that allows prospective homebuyers to pay the full mortgage amount of the prior one by securing another one. The new loan comes with its own set of terms and interest rates, which is different from the original one. Borrowers can take up to 80% of the appraised value of their house, and interest rates are much lower when compared to other types of personal loans. There are several reasons one should refinance their home, including various advantages that come along with it. Below-mentioned is a step-by-step guide to mortgage refinancing in Canada.
Step 1: You must decide whether you need to apply for a loan:It is a serious and long-term commitment when you refinance your mortgage. Before you decide to approach a lender, you must identify whether you have enough reason to apply for a mortgage refinance. You must keep in mind the below-mentioned reasons:
- Are you planning to renovate your home?
- Are you considering purchasing a new property?
- Will you be required to put enough money into your children's education fund?
- Are you considering starting a new business venture but lack the capital to start?
- Will you need to refinance to consolidate all your debts?
Step 2: Evaluate and decide if a mortgage refinance is the best optionRefinancing your mortgage offers lower interest rates, but it only benefits borrowers under certain circumstances. You must do your due diligence about the current value of the property, including the market rates in your region. If the current situation is ideal, then you should consider refinancing your mortgage. However, you may not reach this conclusion on your own. It is best advised that you speak with a mortgage professional who will provide you with a fair and transparent evaluation of the market condition and advise you if refinancing your mortgage is the correct option.
Step 3: Identify if you will be able to pay off the scheduled monthly payments on a refinanced mortgageWhether you choose to refinance the mortgage on your home, the amount you need to borrow solely depends on the equity in your home. Keep in mind that while continuing to pay your mortgage, the equity in your home increases. The same thing also happens when the value of your property increases. You should ask yourself before applying for a mortgage refinance:
- How much money do I need to borrow?
- How much money can I afford to borrow?
- Do I require the funds immediately? Or is it possible for me to save up for it?
- How much money should I set aside for my monthly loan payments?
- If interest rates increase, will I still be able to pay off the loan?
Step 4: Know your credit scoreYour credit score is integral to you getting your loan request approved or rejected. Lenders will need to know how good you are at handling money and if you can pay off your mortgage every month without any hassle. Traditional lenders usually do not entertain individuals who are in debt, unemployed or have filed for bankruptcy in recent years. Lenders, like private ones, may be more lenient to the ones who are self-employed, or those individuals whose income source is not steady.
Step 5: Explore various mortgage refinance optionsIf you already know that you have a good credit score, it is time for you to evaluate your mortgage refinancing options and find the best one that suits your needs. Different mortgage lenders offer different mortgage terms and interest rates; you need to take the time to understand which best suits your specific requirements.
Step 6: Calculate what will be the total cost of refinancing your mortgageWhen you refinance your mortgage, you are not only going to pay back the amount you borrowed but other expenses such as:
- Home appraisal costs
- Title search fees
- Title insurance fees
- Legal costs