Home refinancing, or replacing an existing mortgage with a new one, is worth considering for several reasons. Investing in a home is one of the biggest and most important decisions any person or family can make. Whether you’re a young adult looking to make your breakthrough into the housing market or a young family looking for a forever home, the choice is an important one. Refinancing your home enables you to free up money and significantly reduce your monthly expenses. With all the attractive rates available through the banks right now, you may be tempted to refinance – however, there are several things to consider before making that decision.
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For many, home financing might be a viable option not only because it may help you achieve other investment and financial goals, but also because it may get you closer to that dream home you’ve always wanted. Before you can qualify, you will need to be evaluated for a loan-to-value ratio of 80% so be sure to keep documents like recent pay stubs and tax bills on hand. Some of the benefits of home refinancing include lower interest rates and monthly payments on your new mortgage, debt consolidation, changing the terms of your mortgage, and tapping into home equity¹.
Now is the best time to refinance your home. Mortgage loans have never been more appealing. Often boasting interest rates lower than 4%, mortgage loans are predicted to remain low for the next couple of years, making right now an opportune time to submit your loan application. If you’re looking to purchase property, a low mortgage rate amps up purchasing power, and if you’re considering refinancing, a low mortgage rate can even drop your mortgage payment.
Your Credit Score Matters
A common misconception is that if you own property and consistently make your mortgage payments in a timely manner, your loan approval is guaranteed. This is not necessarily the case. After all, a mortgage loan is a brand new loan, and the lenders will review your credit and income history. Any notable changes in your credit history or finances can affect the approval of your loan application. This often comes as a shock to many homeowners, particularly those who turn to home refinancing after losing a job and then have their loan application rejected.
Determine Your Refinance Goals
Having a specific, detailed goal in mind when it comes to refinancing your home can help you reach your desired outcome quickly and efficiently. Refinancing your home can potentially achieve multiple financial goals. While some people refinance to secure lower interest rates and to reduce their monthly payments, other property owners refinance to access their home’s equity and acquire cash for home improvements, debt consolidation, amongst other things. Whatever your goal may be, make sure that your goal is clearly defined before speaking to a mortgage lender.
Decide If You Will Be Moving In The Near Future
If you’re concerned that refinancing will chain you to your property, you can wipe that worry from your mind. However, if you’re considering moving in the next few years, refinancing is not the wisest financial move.
Depending on which state you live in, there are various costs associated with home refinancing that can cost as much as 5% of your mortgage loan. However, there are multiple options available to take care of those costs: you can pay out-of-pocket, or you can sometimes wrap those costs into the mortgage. Whichever you decide to go with, it generally takes at least a few years to recoup the costs.
To give you an idea, you might be able to save $150 monthly after refinancing your mortgage. If you need to lower monthly expenses, then this can seem like a logical move. But take into consideration your closing costs, which can cost you an average of $4,000. Given these numbers, it would take you approximately 26 months to make your money back. If you move before the 26 months is up, then you’ll actually wind up losing money.
Factor In Your Equity
Most people forget to factor in their equity when they consider refinancing their mortgage. The notion of reducing your mortgage payment and consequently saving money is enough to make most people jump into a home refinance arrangement. That is, until you discover that your lender won’t refinance your mortgage if you have less than 20% equity. However, there is hope for homeowners with little to no equity. Fannie Mae and Freddie Mac programs can offer a helping hand in such situations, and if you choose to refinance to an FHA mortgage, you only need 5% equity.
The best way to determine your home’s worth is to get a home appraisal. Hiring an appraiser to compare the sales in your area and determine your property’s value can help you decide the best time to refinance.
Should I Refinance?
Every refinance agreement is customized to fit the refinancer’s financial profile. There are different options available, but you can’t rely entirely on your lender to select the right mortgage for you. You must do your own research. Some of your options can include a conventional mortgage, an FHA mortgage, or reduce your mortgage length with a 15-year or 20-year mortgage.
Always keep your eye on the prize and remind yourself of your long-term financial goals when picking a mortgage. Is your aim to eliminate debt quickly, or are you more preoccupied with keeping your monthly payments low? There are pros and cons to every option, the trick is to find the mortgage that is best for you and your financial situation.
[1] Canadian Imperial Bank of Commerce (CIBC). “Should I refinance my mortgage?” CIBC, 2020. https://www.cibc.com/en/personal-banking/mortgages/resource-centre/mortgage-refinancing.html
