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Mortgage Refinancing

The prospect of owning and financing a home can be terrifying, especially for new buyers or those with poor credit. After all, the financial investment involved in purchasing a home can be expensive. For those already locked into a mortgage that has become a burden, it’s important to understand that “refinance” is not a dirty word. Refinancing your home can be a great way to save money and lower interest payments, even with mediocre or below-average credit. It’s easy to understand the urge to sit idly by, especially since refinancing can be trickier with a blemished credit history but that’s no excuse. 

What Does Refinancing Mean?

Refinancing your mortgage loan basically means taking out a new loan with different terms to pay off the original mortgage. Basically, this means getting rid of the original mortgage by paying it off with the new loan and then paying off the new loan instead.

By refinancing your loan you’re performing a complete overhaul so you do not need to agree to a loan with similar terms. If you initially went with a fixed-rate you have the absolute freedom of choosing any other type of mortgage loan.

Did you know that mortgage rates can vary from province to province? Learn more here.

What Are The Pros of Refinancing Your Mortgage?

  • By refinancing your mortgage you can have lower monthly payments. A refinanced loan may increase the length of your term but will result in lower interest rates and more monthly cash flow.
  • If you’ve lowered your interest rate and monthly payments by a significant amount you may be able to afford to decrease the length of your mortgage term. You would do this by paying a little bit more every month and yet paying less than what you were paying in your original mortgage loan overall.
  • More cash in hand. Refinancing a mortgage means refinancing the amount of your original loan and not the amount of the loan you have left to pay.

What Are The Cons of Refinancing Your Mortgage?

  • Longer loan period. When you refinance a loan, the term usually gets extended. If you refinance a 30-year loan in which there are 25 remaining years with another 30-year loan you are then extending your initial 30-year loan to a 35-year loan.
  • You will be incurring more fees by refinancing. These fees may not be easily recovered through lower interest rates.
  • You may end up taking out a bigger mortgage. By incurring new costs related to the loan and using the loan money to pay for it, the amount of your loan can end up being bigger than it needs to be.

What is a cash-out refinance? Find out here.

5 Tips for Refinancing When You Have Poor Credit

As previously mentioned, refinancing is tricky. It can be a really smart move or a move you could regret, depending on the decisions you make. So, it’s important to make good, educated decisions when considering refinancing your loan. Even if your credit is poor, here are five tips to smooth the process. 

Make Sure Your Application is Attractive

It is very important to understand that refinancing with lower than average credit can be challenging so it is crucial to get your ducks in a row before you begin. Turning in a lacklustre application with a poor credit score will not improve your petition. This includes making sure you have all necessary documents pulled together, like pay stubs, the prior year’s tax documents, and any other supporting information you can. For example, if you are due a large raise or promotion, request a letter documenting the change in your pay to show. Job history demonstrates security so asking for a letter from your human resources department documenting the tenure of your employment can also improve your application. When in doubt, too much supportive information demonstrating why you are a good candidate is better than not enough.

Know What to Expect

When refinancing your mortgage, it’s important that you have realistic expectations especially if your credit is less than great. If you have bad credit and you want to refinance your mortgage with the bank that holds your original mortgage, you may not be offered the lowest rate on the market. For those consumers who are struggling with their credit, working with a mortgage broker who can match you with a great B-lender is probably your best option.

Have Equity in Your Property

No matter how beautiful your home is, few banks will be willing to refinance your mortgage if you owe more on it than it is worth. Banks issue loans based on the market value of your property and without your own money invested, the investment for a third party is risky. Different banks require different amounts of equity so be sure to do your research. For example, more conservative banks may want you to have 25% of the home’s value invested, while more aggressive lenders may be okay with 5% to 10%.

Figure Out Your Break-Even Point

Replacing a 5% interest rate with a 4% rate isn’t as simple as it sounds. There are fees and other costs associated with a mortgage, such as closing costs. This can make the math required to make sure a mortgage is right for you a little trickier. As a rule of thumb, refinance only if you can save yourself at least half a percent on your current interest rate, although more is better. Finding the right rate might require shopping around, so be prepared to exercise patience in your quest for the best scenario for you.

Consider Government Insured Loans

Canada, like many other countries, offers government-insured loans. Most government-backed mortgages require less money down and less equity on your home, making it easier for homeowners with poor credit to refinance. Additionally, the Canada Mortgage and Housing Corporation has many resources for borrowers and can help you understand what you can afford and whether refinancing is right for you. While there are some caveats and restrictions on government-insured loans, there are also many benefits for borrowers. If you feel that your other options are not right for you, this can be a popular choice.

While refinancing, especially with poor credit, can seem overwhelming, it is important to realize that it can save you money over the years. By following the tips outlined above and doing your best to keep yourself financially sound, you can refinance your home and save yourself money and as well as time spent fretting about the state of your mortgage interest rate.

Click here to read about how to borrow using your home equity. 

Be Cautious

Overall, refinance your mortgage when…

  • You’ve built up some equity in your property 
  • You have a good payment record
  • You want to reduce your monthly payments
  • You want to change from an adjustable-rate to a fixed rate 

Do not refinance your mortgage if your home has decreased in value. The refinanced loan will be granted on your property’s current value. Thus, the refinanced loan may hold less value than the initial mortgage loan. 

Bottom Line

Refinancing your mortgage can alleviate some of the pressure you may feel from your current mortgage. It can lower your interest rate and payment amount to a certain degree. Depending on your income, you may even be able to afford to pay off your mortgage earlier. However, do remember, refinancing can be tricky and you should keep our tips in mind when considering it. If you are certain refinancing your mortgage is right for you, Loans Canada can help.  


Note:

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