Imagine this: your mortgage is cheaper every month. The interest rate that you’re paying for your mortgage is lower. You can pay off your mortgage faster.
Sounds too good to be true, right?
Surprisingly, you can enjoy these changes if you refinance your mortgage. But, what is a refinanced mortgage and how can you take advantage of it?
If you’re ready to learn more, just keep reading. We have everything you need to know.
What Is Refinancing?
The term “refinance” refers to the act of renegotiating a loan that you currently have. By renegotiating your current terms, you can try to get a lower monthly payment and a lower interest rate. This lowers your overall payment to the entity that provided the loan.
Refinancing isn’t new. In fact, people have used it for years and years to consolidate their debt, pay for large expenses, and make room in their monthly budget.
When you’re refinancing a loan, you’re discussing an entirely new loan agreement. This means that you’re likely going to have a low monthly payment and a lower interest rate like we discussed above.
What Is a Refinanced Mortgage?
If refinancing is the renegotiation of a loan, then a refinanced mortgage is the renegotiation of your mortgage. This means that you have the ability to get terms for your mortgage contract.
In turn, you could have lower mortgage payments as well as a lower interest payment to go along with your mortgage.
You can refinance your mortgage with your current lender or a new lender. Either way, you’re likely to get a better deal than you currently have (as long as you time the refinancing correctly).
What Does It Mean to Refinance a Mortgage?
If you’re still confused, let’s break it down.
Refinancing a mortgage involves two things: (1) agreeing on new mortgage terms and (2) paying off the first mortgage.
Once you agree to and sign onto your ‘second’ mortgage, you’re going to use the money that you’re borrowing to pay off the first one. Then, you’re left with your second and only mortgage to pay off.
Since you used the loan from the second mortgage to pay the first, you now only have to worry about following the terms from the second. This means that you’re paying off one loan to take on another smaller loan.
Should I Refinance My Mortgage?
Each case is different. Everyone has their reason(s) for refinancing their mortgage.
From the interest rate to the monthly payment, there’s a lot to love. But, refinancing isn’t for everyone. In fact, it’s possible for you to negatively impact yourself by going after a refinanced mortgage.
To determine whether or not you should consider refinancing your mortgage, go through our list of reasons that you should refinance your mortgage. If you find that these resonate with you, it may be time to refinance.
Refinancing Your Mortgage May Give You a Lower Interest Rate
If you’re interested in getting a lower interest rate for your mortgage, refinancing may be right for you. Often, people are given awful interest rates when they’re first starting out. As they make their payments over time, their credit scores increase.
If your credit score has improved or you can prove that you’ve been making payments, you might be able to get a lower interest rate on your mortgage.
Getting a lower interest rate could save you a lot of money over time. This means that you’re going to pay less towards the loan overall.
Unfortunately, you may have to incur a prepayment penalty. You should take the time to figure out whether or not the prepayment penalty will be so much that it will cancel out the money that you’d make back in interest.
If you find that you’d save more money by refinancing, you should start considering talking to lenders.
Refinancing Your Mortgage May Allow You to Access Equity in Your Home
Home equity is the difference between the amount that you currently owe for your home and the amount that your home is currently worth.
For example, you may have $150,000 left on your mortgage. If your home is currently worth $200,000, your home equity is valued at $50,000.
Home equity is a measurement that financial professionals use to determine a lot of things about your financial wealth. For one, having more equity in your home is a sign of great wealth, especially if your home equity is greater than 50% of your home’s value.
You can also use your home equity as a tool when you’re selling your home later. You might be able to make a profit off of a home sale if your home equity is large enough.
Plus, you can leverage home equity in a reverse mortgage when you’re older.
The bottom line is that you want to have equity in your home. The greater your equity, the better your financial health is.
Refinancing your mortgage can lessen the amount you owe on your mortgage. Therefore, it can increase the difference between what you owe and how much the home is worth. In turn, you have larger home equity to show off.
Refinancing Your Mortgage May Help You Consolidate Your Debt
Debt consolidation is the process of taking multiple accounts that you owe money on and combining them into one payment. It’s a popular technique for taking multiple accounts and bringing them into one for a single payment rather than several payments.
If you’re dealing with debt in multiple, high-interest accounts, you might want to consider consolidating your debt to decrease the overall amount of money that you’re going to spend.
A refinanced mortgage is a way that people choose to consolidate their debt. This option is great for people who have built enough home equity.
You can use the equity that you’ve collected on your home to pay off high-interest debt through the refinanced mortgage.
What To Expect When You Refinance Your Mortgage
Once you’ve decided to go through with refinancing your mortgage, you’re going to follow steps similar to those that you followed when you applied for your first mortgage. Here’s how the process works.
Shop for the Best Deal
Before you sign onto any kind of loan, you need to do your research. This is the same for a refinanced mortgage.
You should take your time finding the best loan and lender that meets your needs. Here are the factors that we recommend that you take into consideration while you’re trying to find the perfect refinanced mortgage:
- The type of refinancing, whether that be rate-and-term, cash-out, or another type
- The type of loan, whether that be an adjustable-rate or a fixed-rate mortgage
- The term length
- The number and amount in fees that you’ll have to pay upon closing
We should also note that you need to make sure that you’re collecting loan estimates from lenders that you’re considering. This is a standard document that should lay out all of the details of your potential new loan. This may include costs, features, risks, and other important details.
Review the loan estimates and choose the best one for you.
Agree With the Lender You’ve Chosen
Once you’ve chosen the lender that you want to work with based on the loan estimates that your potential lenders gave you, you can lock in your rate. ‘Locking in’ a rate means that you and the lender are agreeing to the rate options that they presented that day.
By locking in your rate, you’re protecting yourself in case rates go up later on. If you don’t lock in the rate, you may have to pay a much higher interest rate than you were planning for. Since mortgage rates fluctuate on a daily basis, it’s best to act on interest rates quickly.
Get Your Documents in Order
As with any big financial decision, you have to submit all of the necessary documents. Usually, lenders will ask you to provide the following:
- Two years of personal tax returns
- Two years of business tax returns (if you owe more than one-fourth of a business)
- Two years of any W-2s or 1099s that you had
- Two months of bank statements
- Proof of any alimony or child support payments
Hopefully, you’ve been keeping track of these documents over the years. If not, you should get these together before your lender asks for them. Having everything in order early makes everything run smoother with the lender.
Follow up as Requested
Once you’ve collected everything that your lender has asked you to send them, they should send all of the information to an underwriter. This is an evaluator who looks at what kind of mortgage terms that the lender may or may not be able to offer you.
While you’re in this step, you should make sure that you’re clearly communicating with the lender. Double-check that they don’t need any more information from you.
If they are missing information, they may not be able to offer you a mortgage. Alternatively, you could end up with worse terms than you would have originally gotten.
Get Approved (Hopefully)
Once the underwriter has (hopefully) determined that you’re eligible for a refinanced mortgage, it’s time for the final approval. This is the stage during which the lender ensures that all of the information is accurate.
If everything is in order, you’re all set. It’s time to get ready for closing.
Close on the Refinanced Mortgage
Once the lender has finalized the terms of your refinanced mortgage, they’re going to send you the closing documents. These detail the final costs and mortgage balance that you need to know about upon starting the loan.
Once you’ve agreed to and signed all of the documents, it’s official. You have refinanced your mortgage.
What Are the Penalties for Refinancing a Mortgage in Canada?
If you live in Canada and you’re trying to refinance your mortgage, you may end up paying the “mortgage refinance penalty.” This is a financial penalty that you have to pay if you change the terms of your mortgage before the term is up. In other words, you’ll be penalized for refinancing your mortgage because you didn’t carry out the agreement of your initial mortgage.
Lenders calculate the penalty using one of two techniques. Either your lender will charge you three months of interest or they’ll calculate the interest rate differential.
However, if your new loan saves you more money than either of those options, the penalty is worth the refinance.
When Is It Smart to Refinance My Mortgage?
If you’re going to refinance your mortgage, you need to make sure that you’re doing so at the best time possible. This means that you need to keep an eye on mortgage interest rates.
You should consider refinancing when interest rates start dropping. When you do this, you can shorten the term of your mortgage and decrease your interest rate during that time.
If you’re feeling confident about the current interest rates, you can opt for a fixed-term mortgage.
When Not to Refinance a Mortgage
On the other hand, you definitely need to know when not to refinance your mortgage. The best rule of thumb is to keep watching mortgage interest rates.
Just as we mentioned before, you’ll want to notice the trends in how the mortgage rates are changing over time.
So, when should you avoid refinancing your mortgage? Well, if you notice that the mortgage interest rates are trending upwards, you should avoid refinancing.
One of the biggest advantages of refinancing your mortgage is getting a lower interest rate. If you don’t wait for the lower mortgage interest rates, you’re not going to be able to take advantage of them.
Patience is key. Just keep watching the trends and consult a financial professional if you’re feeling lost on how to navigate mortgage interest rates.
Is It Better to Refinance With Your Current Mortgage Company?
Even if you’re a fan of your current lender, you need to make sure that you take the time to shop around. Refinancing with your current lender is a great option, but it isn’t necessarily the best option.
The main reason that we suggest shopping around elsewhere is that your current lender knows your current mortgage. That means that they know your current interest rate.
Your current mortgage company may give you a lower interest rate than you currently have, but they may give you a higher interest rate than another mortgage lender would. Your current mortgage lender may give you an interest rate that is slightly lower than the one you have now and expect that you take it because it is technically lower than the one you have.
They know how to take advantage of you because they have more information than other companies would have.
You can ask your current mortgage company what they would offer, but we would recommend asking multiple lenders before making a decision.
Does Mortgage Refinance Require Appraisal?
Most lenders require an appraisal before they agree to refinance your mortgage. However, you may be able to get refinanced without an appraisal.
Those lenders that don’t require refinancing may insist on a higher interest rate in place of the appraisal.
During the appraisal, the lender makes sure that they aren’t going to be lending you too much money for the property that you have the mortgage for.
If your home was accurately appraised when you applied for your first mortgage, you shouldn’t have anything to worry about. Getting an appraisal isn’t a punishment to you. It’s just a way for the lender to cover themselves.
Can You Refinance a Mortgage With Bad Credit?
While it’s true that refinancing a mortgage with poor credit is more difficult, it is possible. In fact, many lenders have programs specifically for people with bad credit.
If you have bad credit, you should take extra time to research these programs.
You should know that you’re less likely to get competitive interest rates. However, it’s not impossible to get a lower interest rate than you have on your current mortgage.
Can You Refinance a Mortgage to Consolidate Debt?
If you’re looking to consolidate your debt, refinancing your mortgage is a great way to do it.
As we discussed earlier, debt consolidation involves taking several debts from different accounts and combining them into one large debt pool that you make payments towards. Debt consolidation is a great way is pay off debt easier and faster.
One of the reasons that we suggest that you use a mortgage refinance to consolidate your debt is so that you can get those lower interest rates that we’ve been talking about.
Considering that most credit cards have interest rates around 20% and greater, a refinanced mortgage is much more favourable especially when interest rates are under 5% (which they often are).
Can I Refinance My Mortgage to Buy a Second Home?
The short answer is yes!
With a cash-out refinance, you can use up to 80% of the equity you own in your first home towards the purchase of a second home. While you’re applying for the cash-out refinance, your lender will ensure that you aren’t taking out more money than you need. This often involves appraisals of both properties.
The term “cash-out refinance” refers to a mortgage loan where you take more money than you actually need for the home that you currently have. This extra money on the loan is then put towards the second home that you’re looking at buying.
Can You Refinance a HELOC Into a Mortgage?
When you take out a home equity line of credit (HELOC), you’re going to go through what lenders call an ‘initial draw period.’ Usually lasting ten years, the initial draw period is the time during which you can borrow from the loan as needed.
As you borrow, you can make payments towards it. These are low, interest-only amounts.
After the initial draw period ends, you can no longer borrow any money from your HELOC. This is when you’ll start making full amortized interest and principal payments every month.
Since the principal payments are delayed, people who borrow with a HELOC can end up with payments that are too high for them to pay. They take out more money than they anticipated and aren’t able to pay the money back on time.
If this happens to you, you should consider refinancing your HELOC. This works in the same way as a second mortgage.
You can open a new HELOC to pay off the old one or you can use a mortgage loan to pay it off. Either way, you’ll be able to lower your payments and your interest rates.
How to Refinance a Second Mortgage
If you start your second mortgage and discover that you still can’t make payments comfortably, you might want to consider refinancing again. Luckily, refinancing your second mortgage isn’t much different than how you refinanced the first one.
- You should determine if now is a good time by using the methods we discussed in the section “when is it smart to refinance my mortgage?”
- Evaluate your credit score and match it against qualifications that various lenders share
- Determine what interest rate your new mortgage would need for you to sign on
- Research and talk to different lenders to find out what your best options are
- Gather all of the necessary financial documents
- Once you’ve chosen a lender, you should apply for a refinance
- Keep up with the payments on your new mortgage
We should note that it may be more difficult to get a refinance on a second mortgage. You have to make sure that you’re gathering information before you try to apply. The more information you have, the better off you’ll be.
How to Find the Best Mortgage Refinance Rates
A refinanced mortgage is a great way to get your finances under control. Even if you’re able to make your monthly payments, a refinanced mortgage can help you open up your monthly budget.
Make sure to take the time to do your research before you refinance a mortgage.
If you’re looking for more guidance, check out the rest of our blog. There, we share more financial information just like this.