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Should You Refinance, Renew, Or Switch Your Mortgage?

Written by Jessica Steer
Whether you’re a first-time homebuyer or a seasoned real estate maven, knowing your options when it comes to renewing and refinancing a mortgage is crucial. And having as much knowledge about how these processes work is immensely helpful in making clear decisions on major, long-term financial commitments.
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    Mortgages are malleable products. What you sign at the beginning will not be written in stone. You will be faced with options to renew the mortgage terms or refinance it with your lender. If you are not happy with that lender, you also have the ability to switch your mortgage to another institution. 

    We’ll walk you through these options and clarify what each means. This will help you make better decisions whether you are currently in a mortgage or getting ready to enter one.

    What is mortgage renewal?

     If your mortgage is not fully paid off by the end of its term, you will need to renew it. If you are new to mortgages, this means when you first sign up for a mortgage, you agree to a fixed term on a financing loan. Five years is the most common. When that five-year term approaches its end date, and you have not fully paid off the mortgage, you will need to renew. 

    This offers the home buyer a chance to renew terms that are hopefully more favourable. In other words, a fresh start to the agreement. 

    What to consider for a mortgage renewal? 

    A lot can happen during the timespan from when you agree to terms on your mortgage. Perhaps you have changed jobs, taken on more expenses, or started a family. A mortgage renewal offers an opportune time to evaluate your complete financial position and renew in a way that fits your current situation. 

    This could include getting a better interest rate than what you previously signed on to. That would lower your monthly payment and free up cash. Conversely, maybe you want to make larger monthly payments and reduce the principal quicker. That’s also an option during mortgage renewals.

    By the far the most pressing concern for those renewing a mortgage is interest rates. It’s generally how banks and other lenders compete with each other. Try to get the best rate possible with your lender or consider switching to another institution (more on switching mortgages later). 

    Here are tips to help with mortgage renewal:

    • Don’t get caught off guard by your renewal date and forced to make a quick decision. Plan up to 120 days ahead of the renewal date and give yourself plenty of time to make the best decision. 
    • Use that time to evaluate your entire financial position, taking note of how, or if, it has changed since your mortgage term began.
    • Research the interest rate environment and come prepared when it’s time for the renewal discussion. Banks and lenders compete on mortgage rates, so you should be getting a rate that is competitive with other lenders.

    What does it mean to refinance your mortgage?

    To refinance your mortgage means to renegotiate your existing loan agreement and select new terms. It can be either with your pre-existing financial institution or a new one if you decide to change. This can be beneficial for a variety of reasons, including securing a better interest rate on your loan or accessing the monetary value in your real estate assets. 

    With the average term being five years, it’s common to want to make a change before the mortgage term is up. Of course, it’s not as easy as changing your mind about your mortgage agreement. This process, if done before your mortgage term ends, will likely cost you in the form of a penalty, usually three months of interest.

    Benefits to mortgage refinancing 

    There are plenty of reasons to refinance your mortgage. Some want to unlock the liquidity in their home’s value, while others want to take advantage of lower interest rates to reduce monthly payments. Another common reason to refinance is to consolidate debts, rolling in a big expense like an education cost or home renovation.

    3 reasons to refinance mortgages:

    1. Consolidate debts. You may have high-interest debts that are stretching your finances to the breaking point. Refinancing lets you roll debts under one low interest rate and one easily digestible payment.
    2. Home improvement. If you want to renovate and pump up the property value, refinancing will help you access money from your home equity to make those renos. 
    3. Educational costs. Tuition keeps going up and refinancing gives you a way to pay for it, either for yourself or an offspring.

    What are the costs of mortgage refinancing? 

    As we mentioned earlier, there could be costs associated with this process if you terminate an agreement before it’s matured to full term. Sometimes a lender will cover these costs in order to gain your continued or new business. It’s also important to evaluate the costs of refinancing against the money you would save on a new mortgage with a more advantageous interest rate. The money you pay now could be worth it compared to what you save over the long run. 

    How much can you borrow with mortgage refinancing? 

    Take the estimated current value of your home ($500,000 for example) and multiply it by 65% - the maximum you are allowed to borrow on your home’s value. Take that number, subtract your mortgage’s outstanding balance, say $250,000, and you’ve got the amount you can borrow. So in this scenario, a home worth $500,000 x 65% - $250,000 will equal a $75,000 borrow limit in refinancing. Of course, if you have any other lines of credit or debts against your home; you’ll need to subtract that too.

    What does switching mortgages mean?

    Switching your mortgage means simply taking your mortgage from one lender to another at the completion of your term or sooner. A common reason for this is to secure a better interest rate than you are being offered by your current lender.

    Switching before your term is completed could be an expensive move because you are breaking a contract. However, if the penalty is outweighed by the savings you’ll get on a better rate with another lender, then it is definitely worth it. One important note about switching is that you cannot change the mortgage amount or the amortization, so don’t switch your mortgage with the intention to get a bigger loan. 

    Before switching mortgages, always consider:

    • Will you qualify the federal government’s “stress test” with the new lender? You may need to prove you can afford a certain level of payments with the new lender.
    • Are there costs to change lenders? There could be various fees for transferring or assigning your mortgage to a new lender. See if your new lender will cover it.
    • A previously insured mortgage could be required to pay a new mortgage loan insurance premium when you switch.
    • If you have any collateral charges on your mortgage, you may need to clear that off first before switching to a new lender. 

    Ready to refinance your home? – Spring Financial is here to help

    Whether you’re looking to consolidate debt or access your home equity, Spring Financial (a sister company of Spring Financial) has the answers to guide your mortgage refinancing decision. Talk to Spring Financial about your refinancing needs today!

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