Refinancing a Mortgage

Mortgage refinancing is all about saving money, and reducing your monthly payments. Find out if mortgage refinancing makes sense for you, and what you need to know.

What is refinancing your mortgage?

Refinancing your mortgage is when you pay off the existing mortgage with new mortgage funds and increase the mortgage balance. If the mortgage balance remains the same as before, and you just change lenders, it is called a switch. Refinancing can be done with your current lender or a new one. Most people opt to go with a new lender to take advantage of lower rates.

What is involved in refinancing a mortgage?

To refinance a mortgage there are two options. You can talk to your current lender and see if they will give you a larger mortgage, or seek the help of a mortgage broker who will have access to many lenders. Usually, your current lender will not give a competitive rate on a refinance, compared to a new lender, but it is always good to find out what they are offering. Once you have decided which route to take, the process is similar to applying for any other mortgage. You will be required to show proof of income, debts, and the home may need to be appraised. If you are changing lenders there will be some legal costs, however, these are usually more than offset by interest savings. If your current mortgage is not up for renewal, there will be costs and penalties associated with switching lenders. You should check with your current lender and get a payout amount before talking to a broker as it will be required to access whether or not moving makes sense.

What are the benefits of refinancing your home?

The main benefit of refinancing your home is to save money on interest. Mortgages usually have the lowest interest rate of any debt, therefore, moving higher interest debt into your mortgage will save you money. Many people also refinance to access the equity in their home for various purchases including renovations.

How much of the value of your home can you refinance?

Typically most lenders will allow refinancing up to 80% of a home’s value. This 80% represents the total of all financing secured against the property including lines of credit, whether they are used or not. The existing mortgage, and any secured financing, would need to be paid out from the new mortgage funds. Secured lines of credit would need to also be paid out and closed if refinancing to the full 80%.

What does refinancing a mortgage cost?

The cost to refinance a mortgage can vary depending on the situation, but there will be legal fees and possibly an appraisal. Legal fees can be around $1,000 – $1,500 and appraisals cost $300 and up depending on the location and size of the house. If you are not looking for the full 80% of the home’s value, an appraisal can often be automated which reduces the cost. When the amount being refinanced is below 65% of the home’s value an appraisal is sometimes not required. If you are breaking the term of your existing mortgage there will be additional discharge costs and penalties. It is always a good idea to ask your current lender what these costs will be. You don’t have to tell them why you want to know, but try to get the payout amount in writing with a payout date.

Does refinancing hurt credit?

Refinancing does not hurt your credit, in fact, it should improve it. When you refinance to consolidate debt many of the debts will get paid off. Once some or all of the debts are paid off, it is often a good idea to close these accounts. Having too many open accounts can negatively affect your credit score, even if you don’t owe anything. Too much available credit is actually a negative credit scoring factor.

What are the requirements for mortgage refinancing?

The requirements to refinance a mortgage are basically the same as applying for a mortgage to purchase a home, besides the 80% loan to value limit. You will have to income qualify, and the house may need an appraisal. There are some lenders who will qualify solely based on the equity you have in your home, but the rates will be higher than if your income qualifies with an “A” lender. Qualifying based on equity is not a good long-term plan as the interest costs are higher, but if you are just needing some money to fix and sell the property, it can be a viable solution.

What are mortgage refinancing rates?

Mortgage refinancing rates are slightly higher than insured purchase rates you may see advertised. Since refinances are not insurable, the lender has to take on more risk, which is reflected in the interest rate being charged. A sample rate at the time of writing this was 0.5% higher than an insured/insurable purchase rate.