To Refinance or Not to Refinance: That Is the Question
Once upon a time you purchased a home. It was the place you saw growing both your dreams, in a secured environment, and also a vessel to financial prosperity in the future. Then…something happens in your life and you find yourself considering a refinance as a way out of a situation you had not anticipated.
- Bob and Mary have been married for 54 years when she is diagnosed with cancer. Bob takes care of her and their savings end up fully depleted due to the extra costs the illness incurs. After she passes, Bob finds himself needing to access funds for the balance of his retirement.
- Jim has been in the oil industry for years. He was let go during the last downturn. He went through first his savings and then accumulated debt until he was able to find a similar position. Now he is back at work but feels that he isn’t catching up and would like just one payment for all debts.
- Susan went through a major illness. Her family lent her money so she could take time off work to recover. Now that she has done so, she would like to pay them back in full to avoid any family money wars.
The point of all these stories is to show you that life happens and a refinance can be a way to get back on track. Many people feel almost a sense of shame as far as refinances go; as though they should have been better with their money management.
So what should you know before you refinance?
- The maximum amount allowable for a refinance is 80% of the property’s value. A $400,000 home will only be eligible for a $300,000 mortgage. If you currently owe more than 80% then a refinance will not help.
- There will be costs. A mortgage is a contract and if it is broken early on, there will be a penalty. A call to your current mortgage provider is a very good idea as a first step. There will also be legal fees to register the new mortgage and possibly an appraisal. Each lender is different so make sure you look around for the best option.
- The interest rates for these mortgages are higher. A couple of years back, the government came in and made some changes. Those with more than 20% equity in their homes are considered a higher risk, as the banks can no longer get CMHC insurance on these loans. As of today, a 5 year mortgage for someone with 5% down would have an interest rate of about 3.34% OAC. A refinance would have a best rate of about 3.69% OAC.
A refinance can make good sense if you’re considering paying out credit cards (which have higher interest rates) but make sure to consider getting rid of some of your available credit, so you don’t find yourself here again. Additionally, if you’ve substantially decreased your monthly borrowing costs, it’s a great time to consider taking the amounts you were used to paying, and directing it right back into a savings account or against the mortgage.
Life happens to the best of us and a refinance should be seen as nothing more than a potentially useful tool in your arsenal. Call your mortgage professional today to see if it may be right for you.