What is refinancing and when should I do it?

Dated: September 8 2021

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In your lifetime, your primary residence will likely be the largest asset that you own. Using your assets as leverage can help you improve your overall financial health, consolidate debts you might have racked up, and can also help you expand your investment portfolio helping you meet your retirement savings goals faster. In this blog, we’ll discuss the reasons you might refinance your mortgage, the benefits of refinancing, and when might be the best time to refinance. 

What does “refinancing my mortgage” mean? 

Mortgage refinancing is the process of having a lender pay off your current mortgage thus replacing it with a brand new one to save you money or alter the terms of the loan in ways that will benefit you. When someone refinances, they effectively seek to make favourable changes to their interest rate, payment schedule, and/or other terms outlined in their contract. To refinance, you must go through the mortgage application process again and if approved, the borrower gets a new contract that takes the place of the original agreement.

Over time, the value of your home increases which creates equity in the asset. For example, if you purchased your home in 2016 for $400,000, the value of your home will have increased with the market trends and you will have been making mortgage payments on the loan for the last five years. For the sake of this example, let’s say the current value of your home in 2021 is $600,000 and you currently owe $350,000. 

Lenders will allow you to refinance your mortgage up to 80% of the total appraised value, should you qualify. This means if your home is worth $600,000 you can apply for a new mortgage of $480,000. After your existing mortgage is paid out, you will have $130,000 to pay off outside debts (credit cards, car loans, personal loans), complete major home renovations, and/or use that money to purchase another property or fund an investment account. 

What are the reasons I might want to refinance? 

There are four main reasons why a homeowner would want to refinance their existing mortgage. This includes: 

  • Paying off existing debt outside the mortgage to reduce the interest rate and lower your monthly payment obligations 

  • Accessing the equity you have built up in the home over time to finance renovations to your home, increasing the value of the property 

  • Accessing the equity you have built up in your home to put a down payment on a vacation property, second home or a rental property 

  • Accessing the equity in your home to invest in an RRSP or TFSA for retirement

What are the benefits of refinancing my mortgage? 

There are many reasons why you would refinance your mortgage, such as the ones listed above, but there are also many benefits that go along with them. Here are some of the benefits of refinancing your mortgage: 

Reduce your monthly payment obligations, freeing up cash flow for savings 

Consumer debt is common and very easy to get into! With car payments, credit card balances, and other personal obligations, your monthly bills can become overwhelming and expensive. Unsecured credit (credit that is not attached to your home) typically has a higher interest rate as well. With the low-interest-rate environment we are currently experiencing, you could combine all of your monthly payments into one easy payment at an interest rate of 1-2% for the next 5 years. This will allow you to free up cash flow and pad your emergency savings account (which we’ve all learned over the last 18 months is important!).  

Complete large home renovations that will increase the value of your home

Home renovations are sometimes necessary to maintain the property and help keep or increase its value over time. They can be costly, and with the rising prices of goods and services, it can seem impossible to save up the cash for a major project! Refinancing your mortgage can give you access to the funds you will need to complete these renovations and will help increase the value of your home allowing you to refinance again in the future to fund other investments or to increase your profits when you go to sell your home. 

Reduce the total interest paid over the life of your mortgage

When you refinance, you will be renegotiating the original terms that you set out when you first purchased your home. This means you will probably be reducing the interest rate, and you can also reduce the amount of time it will take you to pay off your mortgage. 

The amortization period is the total time it will take you to pay off your mortgage entirely. A standard amortization schedule is 25 or 30 years, but refinancing allows you to reduce this number to (potentially) 15 or 20 years. The quicker you pay off your mortgage, the less interest you will accrue over the life of the loan. 

Yes, your payment will be higher but a good lender will help you crunch the numbers to see how much money this will save you in the end!

When is the best time to refinance? 

There is no one answer to this question, but if it makes sense financially for you to refinance, you should jump on that opportunity. It’s also important to note that if you decide to refinance near the end of the term (the contract time that you hold your existing interest rate) you will likely pay less of a penalty for breaking the existing contract. Waiting to refinance within six months of the end of your term will result in paying no penalty. 

Refinancing can help save you money and access the cash you need to diversify your investment portfolio. To learn more about how Bosley Agents can help you with your real estate investing needs, please visit: https://www.bosleyrealestate.com/contact.php

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Christan Bosley

Christan is a dedicated real estate professional that has been working at Bosley Real Estate since the age of 12. From front desk operations to a successful sales career to general manager, Christan ....

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