May 26, 2022
Refinance 101: Is Refinancing Your Mortgage the Right Choice For You?
Refinancing your home is a process most people are aware of but may not understand the intricacies to. It can be a life changing financial decision: for better or for worse. Which means that the most vital aspect of refinancing is going in with the right mindset, a helping hand, and as much information as possible. This is not a fast process–refinancing can take a couple of weeks, but may stretch out over a month, if not longer.
Here’s an overview of what that time might look like if you are considering refinancing.
What is refinancing?
Refinancing your home is when you renegotiate your mortgage. Essentially, you are trading out your existing mortgage. Whichever bank or lender you go through will pay off your previous mortgage loan and as a result, issue you a new one.
Why would you refinance?
There are a handful of vital reasons that somebody may choose to refinance their mortgage.
- To lower their interest rate.
This is the most common reason to refinance. Most sources say that if interest rates are between 1% and 2% lower than your current loan, it’s a good time to consider refinancing if you can find the right terms. If interest rates have dropped more than 2% then there’s a high chance you’ll benefit from refinancing.
- Go from a variable interest rate to a fixed interest rate.
A variable rate will often be lower when you take out your mortgage but may rise over time as the economy shifts. Generally, it will go up rather than down. If your adjustable rate has started to grow, there may be a long-term financial benefit to moving to a fixed rate but this is a conversation to have with your mortgage broker to see if your variable or a fixed rate is the best way to go.
- To change the length of your term.
While you can extend the term of your mortgage, mostly people aim to reduce the term. If you had a 30-year mortgage and are five years in, you can refinance and instead move to a 15-year mortgage, saving yourself 10 years overall. Some people will choose to lengthen the term and tap into their home equity, though, for anything from home renovations to putting their kid through college to paying off a medical emergency. It is not always advised, but in some situations it’s a valuable option to get you out of a tight squeeze.
- To consolidate debts.
Refinancing can allow you to shift student loans and car loans and the sort into one singular loan to reduce how many monthly payments you are having to make.
What should you ask yourself before you refinance?
There are two big questions to consider more than anything.
Start off with the question of how long you even plan to live in your home for. If you can say immediately that you want to move out within the next few years, you probably shouldn’t refinance.
However, if you know you want to be in your current home for at least another five to ten years, then you need to ask yourself if it’s going to be profitable for you to refinance.
There’s a few things that go into this question. Firstly, is the interest rate going to be low enough to justify the refinance. Some people might wonder why there is an ‘enough’ threshold. Isn’t any amount lower worth it? And the answer is, well, that depends. Closing costs for refinancing are generally going to run between 3% and 6% of the principal loan cost. There are also penalties to consider from most bank-held mortgages if you choose to refinance before the end of your term. These penalties can be quite high (tens of thousands of dollars in some cases), so this needs to be taken into consideration as well.
The best thing you can do at this stage is to consult a mortgage broker.
What are the steps involved in refinancing?
If you’re informed on what refinancing is and what it can do for you, you know what you want out of refinancing, and you have verified that it will be profitable for you to refinance, here comes the time to understand what the process will look like.
- Start exploring your options.
Your best bet is to speak with your mortgage broker to see what options they suggest based on your particular situation. Mortgage brokers have direct relationships with banks and lenders and can advise you of multiple ways you could look at proceeding.
- Lock in your interest rate.
Once your interest rate is locked in, it won’t change, even as the refinancing process continues forward. As mentioned above, this is not necessarily going to move quickly, so even if rates change from this point on, whatever you’ve locked in won’t shift with them. There are sometimes expiration dates on your approvals, so make sure you understand how long your rate will be locked in for.
- Get your home appraised.
Now, the bank or lender will send somebody to assess the value of your home and other assets as they go over your application. You can expect to field a lot of questions, so do what you can to answer in a timely fashion, to help keep this step from dragging on for too long.
- Close on your loan.
And once all the above boxes have been ticked, congratulations! You’ve weathered the journey of refinancing and will close on your loan.
This is, of course, a very wide-brush overview of what is generally an involved process that has deep and wide effects on your financial status. If based on what you’ve read this is something you want to consider, don’t try and do it alone! Make this decision with as much help as you can. It’s an intimidating prospect to tackle but when done successfully it can provide vital financial gain.