When you’re a homeowner, chances are you’ll have a lot of different things on your mind from day to day. The roof is leaking, the warranty for the water heater is expired, the lawn needs mowing, and of course, the mortgage needs paying. What with all the house related expenses that every homeowner must deal with on a regular basis, it’s difficult to determine when the best time to refinance your mortgage will be. In fact, the refinancing process itself can be a chore of its own. There are a few steps that every homeowner must take before they’ll be able to receive the refinancing they need. One of the most important steps getting their home appraised in order to determine its value.
What does “refinancing” a mortgage even mean? And for that matter, how does a home appraisal tend to be carried out? What are the various factors that an appraisal expert will examine before they can calculate what your home is worth on the real estate market? Whether you’re currently mortgaging a home or are interested in mortgaging one somewhere down the line, it’s good to be informed about refinancing so that you’ll be prepared for it, if and when it comes time to do so. While the appraisal itself isn’t always cheap or convenient, it’s an essential part of the refinancing process. So, if you’re a bit confused about the refinancing and appraisal procedures, don’t worry, because Loans Canada has some of the answers you need.
What Does “Refinancing” Mean and How Can It Benefit Me?
Essentially, “refinancing” a mortgage means that a homeowner will be ending their current mortgage contract by trading in their original loan and applying for another, one that will hopefully come with more favorable rates and mortgage terms. Homeowners often choose to refinance when their mortgage term ends and their contract is up for renewal. However, for a penalty, also known as a “prepayment fee”, they can also break their contract early. There are a few different reasons why homeowners decide that refinancing is their best option, which we’ll discuss below.
The first and often most common justification for refinancing, as we just mentioned, is that the homeowner is trying to secure a better interest rate. They might even be able to switch their rate from variable to a fixed lower rate. This means they’ll always be able to pay the same interest rate, rather than one that goes up and down with their bank’s prime rate. A better mortgage rate can do wonders for any homeowner’s finances, saving them hundreds of dollars every year. By doing so, they may even be able to shave a few years off their amortization period.
What’s the difference between a mortgage term and an amortization period? Find out here.
With a lower interest rate, those homeowners will also be able to build their home equity faster. In fact, the second most common reason why people decide to refinance their mortgage is to gain access to their home equity, which we’ll discuss further in the section below. Home equity refers to the difference between the home’s market value and the remaining balance the homeowner owes on their mortgage. In other words, the more of their mortgage they manage to pay off, the more home equity the homeowner has to borrow from. In turn, if their home rises in value, their home equity will rise with it. Then, once they have a sufficient amount of accessible equity, they can use it for whatever financial transactions they desire, from buying a new car to renovating or repairing their home. One of the main areas where homeowners will also use their home equity is to consolidate their other outstanding debts, such as the balances on their high-interest credit cards.
Click here to find out how to borrow using your home equity.
How to Refinance Your Mortgage
Whatever your reasoning for refinancing your mortgage might be, it’s good to know how to do it properly before you go buying or fixing anything with the extra money you’ll hopefully be getting. Unfortunately, if it isn’t done properly, refinancing can actually end up costing you more money, if you’re unable to secure a lower mortgage rate that is. There are also a number of penalties and other expenses associated with the act of breaking your original mortgage contract early or when it ends, such as the prepayment fee, legal fee, as well as mortgage discharge and registration fees. So, if you’re thinking about refinancing, make sure to speak to your lender for which fees apply to your specific case.
That brings us to the refinancing process. As we said, in order to get going, homeowners must first break their original mortgage contract and negotiate for another. Essentially, they’ll have to start the whole loan application procedure all over again. They can go to their lender and re-apply for a new loan contract, wherein their employment record, credit, current debts, and various other factors will be reexamined to determine their current state of creditworthiness. Strictly speaking, there are 3 different ways that homeowners can refinance their mortgage
Breaking an Existing Mortgage Early or at the Term Renewal Date
In either case, the homeowner has the choice to either stay with their current lender or shop around for a new one, both with the hopes of getting a better mortgage rate. Once again, there are various cost to consider here, especially if the homeowner is breaking the contract before their mortgage is up for renewal. For instance, if the homeowner was already paying a fixed rate and broke their mortgage early, their prepayment fee could be upwards of 3-months worth of interest payments, whether they decided to stay with their current lender or not. There is no prepayment for homeowners who wait until their mortgage term is over. However, there will be a mandatory mortgage registration fee for an early or timely refinance, no matter if the homeowner stays with their current lender or decides to find another.
To know what happens when you break your mortgage contract early, click here.
These are just some of the factors that need to be considered before the refinancing process is started. So, if the amount of money you’ll be saving with your potential new mortgage rate is more than the sum of the refinancing fees, it might be worth it to break your mortgage contract. Also, with every new lender comes a whole new type of application and approval process, so prepare yourself if you’re planning to switch lenders. If not, there are two other refinancing methods that you can choose from.
Adding a HELOC (Home Equity Line of Credit)
The second method of refinancing is done by acquiring a home equity line of credit through the homeowner’s existing lender. This type of credit line allows the homeowner to dip into a maximum of 80% of their home’s value, without having to break their original mortgage or pay the prepayment penalty at all. They can borrow from this line of credit whenever they need and can pay it back in monthly, interest-only payments (minimum payments), along with their regular mortgage payment. However, it will be more financially sound for them to pay more than the minimum payment each month, as the accumulated interest can cost them thousands of dollars extra in the long run. They’ll only have to pay interest on the amount they’ve borrowed, not on the total amount of credit that’s available.
Just be aware that borrowers need to already have at least 20% in accessible home equity on their home in order to qualify for a HELOC.
Click here to know when tapping into home equity is the right choice.
Getting a Blended Mortgage
The third way that borrowers can either refinance for a new mortgage rate or gain access to their home equity is to get a “blended mortgage”. This is also done by negotiating for a new mortgage contract with a new rate through the existing lender. The rates of the old mortgage and the new one will then be blended together to form a final mortgage rate. While homeowners won’t be getting the lowest interest rate possible here, their new rate will likely be a bit lower than their original rate. One of the main benefits here is that since the borrower is not technically breaking their mortgage contract, they won’t be charged a prepayment penalty.
To learn more about how blended mortgages can save you money, read this.
There are also 2 different kinds of blended mortgage, known as the “blend to term” and the “blend and extend”. If you have a blend-to-term mortgage, you’ll pay a new blended rate based on the time remaining on your current mortgage term, while the time left on the term itself will not be extended. With a blend-and-extend mortgage, you’ll be given a similar blended rate, but your lender will also re-extend your mortgage term back to its original length, which the new rate will be based on. With either selection, you’ll be avoiding the prepayment penalty.
Check out this infographic to learn just how much it costs to purchase a home in your city.
How Does an Appraisal Work?
As we mentioned at the beginning of the article, there are a few things you need to do before you’ll be approved for refinancing. One of the first steps you’ll need to undertake is to have a professional appraiser assess your home to calculate its fair market value. For most lenders, an accurate appraisal is a required document during the refinancing approval procedure. Using an appraisal report, your lender will be able to determine whether or not the remaining balance of your mortgage loan outweighs the property’s value. While you, as the homeowner, will have to pay for the appraisal itself, your mortgage lender will retain the rights to the original version of the appraisal report. They do so because they will be organizing the appraisal process for you. However, you will have access to a copy of the report to keep for your records. A standard appraisal usually costs between $300-400, depending on the location of your home and the type of property it is.
Documents For The Appraiser’s Inspection
There are a few documents that you should have on-hand for the appraiser’s inspection when they arrive on your property. If you do have access to them, it’s good to have:
- A recent copy of the Property Tax Assessment Bill
- A plot/blueprint or property survey of the home and land
- Home inspection reports
- A list of any recent renovations or additions and their costs
The Appraisal Process
Generally, there are 3 different parts of the appraisal that homeowners can expect:
Making an Appointment with the Appraiser
Once your lender has contacted an appraisal expert, you’ll receive a call from them after one or two business days, so you can discuss a date and time to have your property inspected.
Inspection of the Property
Upon the appraiser’s arrival, their inspection of the property should take approximately 30-minutes to complete. During that time, they’ll examine several key issues in and around your property to get a basic estimation of the home’s value. Some specific points of examination include, but aren’t necessarily limited to:
- The location of the property.
- The amenities on site.
- The physical condition of both the home and the land it’s built on.
- The age of the house.
- The condition of the plumbing and electricity.
- Required maintenance or repairs.
- The square footage of both the home and the land.
- The number of bedrooms in the home.
- Any recent renovations or additions that the homeowner has made.
- Outbuildings, garages, pools, etc.
Completion of the Appraisal Report
Once the on-site inspection of your home and property is finished, the appraiser will not be able to give you a complete report right away. They’ll also need to take other factors into consideration, such as the neighborhood where your property resides. One of the ways they calculate the value of your home is by comparing and contrasting it to 3-4 other homes that have been sold in the area over the past few years. Doing this will give the appraiser a more accurate assessment of what other homes in the neighborhood are going for on the real estate market. For example, if your home is of a similar size to another, but several decades older and in worse condition, it can have an effect on your home’s value. On the other hand, if your home is older, but has been well maintained and is in a condition that’s comparable to the others, your home could rise in value.
After the appraiser finishes their report and determines an appropriate market value, they’ll send it back to the lender, who should provide you with a copy.
Preparing Your Home For Inspection
When it comes to the inspection itself, the appraiser will want to make a thorough report, but also needs to do so within a certain timeframe. For that reason, it’s best to not only have yourself prepared with the appropriate documents on hand but to also have your home ready and waiting. This means having the home organized and tidy, both inside and out, to give the appraiser access to everything they need. For instance, most appraisals consist of an inspection of the roof, so it’s good to have your attic or crawlspace clean and accessible. If you have a garage, make sure it’s free of clutter.
Afterward, the only other thing to do will be to wait for the inspection to finish. During that time, it’s best to just sit back and make yourself available for any questions the appraiser has for you. Then, once your appraisal is finished and your home’s value is determined, you’ll be that much closer to receiving the financing you need.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
