Should You Refinance

By: Mitchell Saldanha Real Estate Team

Should You Refinance

Tags: Refinance, COVID-19, Mortgage, Real Estate, Home, HELOC

The COVID-19 pandemic has caused a literal world of trouble, affecting both household finances and the global economy. During the crisis, many are considering refinancing their mortgages.

Whether you should refinance during the coronavirus pandemic is a question best answered with a professional who can walk you through all of your options and personal circumstances. Speaking to a mortgage broker is the best thing you can do (and consulting with one is free of charge).

What is refinancing a mortgage?

 

A mortgage refinance is when you break your current mortgage and start a new one. Your old mortgage is paid off by the new mortgage, which gives you the chance to borrow additional cash or change the conditions of your original contract. While you’ll be charged a prepayment penalty for breaking your mortgage, the benefits of starting a new mortgage may be worth it.
Another thing to note is that if your mortgage is coming up for renewal, now could be a good time to refinance. Refinancing is generally less expensive when it is done at renewal time.

How much can a refinance cost?

 

Refinancing a mortgage means breaking your mortgage early, which will possibly incur at least two costs. First, a lawyer must change the financing on title. This cost is sometimes fully or partly covered by the lender.
The more significant cost is your prepayment penalty, which your current lender charges you for breaking your mortgage contract. This amount is calculated as either three months’ interest or the interest rate differential payment (IRD), whichever is greater. 

3 reasons to refinance your mortgage

1. Accessing equity in your home

Equity is the part of your home you actually own, worked out by taking the market value of the property, less the remaining mortgage balance you have on it. If you’ve built up equity in your home, you might be able to get a loan using your equity as collateral. 
There are several ways to access your home equity, two important options to consider are:

Option 1: Accessing equity by refinancing

When refinancing your mortgage, you can choose to increase your current mortgage balance to access a lump sum of money from the amount you’ve already previously paid off. You would start a new mortgage with a higher mortgage amount that includes the additional cash amount you want to take out plus your remaining balance. Because it is a new mortgage, you’ll start paying interest on the additional amount immediately, so this option makes sense if you know with certainty that you require that extra cash in the near future. 

Option 2: Obtaining a Home equity line of credit (HELOC)

Another way to tap into your home equity is through a HELOC. A HELOC works a bit like a credit card in how you access the funds, you just draw money from your HELOC. You can then choose to pay a minimum of just the interest on the HELOC loan each month, in addition to your mortgage payment. HELOCs are normally used for big one-off costs like remodelling or university tuition, but they can also be used as a personal line of credit. HELOCs make sense if you are concerned that you may need some extra cash in the future but don’t really need it right now.

Bonus Option: Refinance to get a HELOC

You’ll only be able to use a HELOC if you originally opted for a mortgage that included one. If your current mortgage doesn’t include a HELOC, refinancing allows you to get one added to your current mortgage. Since you are already refinancing to get the HELOC, you can make any necessary adjustments to your mortgage at the same time. 

2. Lowering your rate

Mortgage rates are adjusted regularly. In normal circumstances one of the most common reasons to refinance is to get a lower rate, which can save you money on interest over time. When those savings are more than the prepayment penalties, it makes good financial sense to refinance.

3. Refinancing to consolidate debt

Because mortgages are secured loans, they have lower interest rates than other sources of credit, like credit cards or personal loans. They’re a great place to consolidate your debts, reducing the overall amount of interest you pay.

The way this is done is by accessing your home’s equity. When refinancing, you’ll take out a larger mortgage than you need to pay off your current mortgage, then use that cash to pay off your other debts. This gives you a single payment to make each month, likely at a lower overall rate (versus the various interest rates of your other loans).

The bottom line: Is the COVID-19 crisis a good time to refinance?

If you’re in need of cash during this pandemic, but aren’t in dire financial straits, then refinancing could be an option for you during this time. Additionally, it might be worth refinancing if the rates are significantly lower than your current rate.
However, you’ll need to consider your own needs and circumstances. The best thing you can do is speak to a mortgage broker who can give you a free personal assessment – do it sooner rather than later. They’ll be able to help you calculate costs and consider different options available to you during the coronavirus pandemic.