Refinancing A Mortgage - The Basics
It's 2021 and mortgage rates are extremely low due to the global pandemic. You may be thinking of refinancing your current mortgage to take advantage of these low rates, but maybe aren't entirely sure about what refinancing entails or if it's right for you. Below I will break down the basics of mortgage refinancing to hopefully give you a better understanding on the subject.
What does refinancing a mortgage a mean?
Refinancing a mortgage means renegotiating the existing mortgage loan agreement. This is usually done to access the equity in your home or to lower other borrowing costs by taking advantage of a lower interest rate. Historically the rule of thumb has been that refinancing for a lower interest rate is a good idea if you can reduce your current interest rate by at least 2%, however, many lenders say 1% savings is enough of an incentive to refinance.
Refinancing can also be used to consolidate debt or pay for other large expenses such as home renovations or education costs. Refinancing a mortgage gives you the opportunity to select new terms for your mortgage loan agreement going forward.
It's important to weigh the potential costs before making the move to refinance. You may be on the hook for prepayment charges if the agreement is being ended before the term has finished, and there could be associated fees for property valuation & registration. It is possible that your new lender may cover some or all of these costs for you, depending on the lender and the situation. If you are able to take advantage of a lower interest rate your overall savings may be well worth it.
What is equity?
As you own your home and make payments towards your mortgage over time, you build the equity in your home. Determining the amount of equity you have in your home will help you to determine the amount of money you can borrow with refinancing.
So what is my home currently worth?
An experienced realtor can help you to determine the recommended market value of your home based on recent sales in your neighbourhood and a few other factors. Please don't hesitate to reach out if you would like to have a discussion with me about your home value; I'm here to help!
How do I calculate how much I could potentially borrow?
You can borrow a maximum of 80% of your homes value. To find out the maximum that you can potentially borrow, take the estimated current value of your home and multiply it by 0.8. Next subtract the outstanding balance of your mortgage and any other outstanding debts secured by your home. The result is the maximum amount you could potentially borrow.
Current Value of Home: $700,000
Outstanding Balance of Mortgage: $200,000
Outstanding Line Of Credit Secured By The home: $30,000
$700,000 x 0.8 = $560,000
$560,000 - $200,000 - $30,000 = $330,000
Result: The maximum amount you could potentially borrow would be $330,000.
The Bottom Line:
Refinancing can be a good move if it reduces your mortgage payment amount, shortens the term of your loan, or helps you to build equity at a faster rate. It can also be a great tool for bringing debt under control. Before refinancing it's important to take a look at your financial situation and consider how long you plan to stay in your home and the money you will save by refinancing. And always consult with an experienced mortgage professional who can best look into your situation and advise on the best possible options for you.
Please let me know if you have any questions about refinancing or real estate in general - I'm here to help!
The Condo Confidential