Mortgage Refinancing & Debt Consolidation
Mortgage refinancing allows borrowers to pay off an existing loan and replace it with a new one. This process can help homeowners improve their financial situation by getting a lower interest rate, accessing home equity, consolidating debt or changing their terms.
What is a mortgage refinance?
A mortgage refinance acts as a brand new home loan that is used to pay off an existing one. While it may seem counterproductive to take out a new loan when a borrower has already been paying off another one, refinancing can offer a number of advantages that make it worthwhile.
What are the benefits of a mortgage refinance?
The most common reason borrowers refinance their mortgage is to take advantage of low mortgage rates. If a homeowner is paying higher interest rates on a loan, refinancing when mortgage rates decrease will allow them to both lower their monthly payments and save on the amount of money required throughout the lifespan of the loan.
Another advantage to refinancing is accessing a property’s equity. Borrowers can access up to 80 percent of their home’s value, using the money for everything from home improvement to that once in a life time trip. This can come in the form of either a home equity loan or home equity line of credit, also known as a HELOC. These types of loans often feature lower rates than traditional loans, resulting in further savings for homeowners.
Consolidating debt is also an option for homeowners looking to refinance. By consolidating debt from other sources, such as credit cards and car loans into a mortgage, borrowers can take advantage of low interest rates and simplify their payment strategy at the same time.
Refinancing also offers borrowers the chance to shorten or extend their loan terms. Shortening a mortgage’s term can help homeowners build equity in a property at a faster rate, while lengthening terms can result in lower monthly payments.
Additionally, borrowers can decide to utilize either an adjustable-rate mortgage or a fixed-rate mortgage, weighing the advantages and disadvantages of each.
What are the disadvantages of a mortgage refinance?
While refinancing a mortgage can save a large amount of money, it can also cost money.
Some mortgages may feature a prepayment penalty that will result in fees for breaking its terms. This fee can be a significant amount, making it important for borrowers to find out if they will face a prepayment charge, and if so, how much. The whole point of refinancing is to improve a borrower’s financial decision, so if a prepayment charge will result in financial stress that will not be improved through a refinance, it may be wiser to stay with the current mortgage.
In addition, costs associated with closing a loan will apply to a refinance.
Our brokers will help you determine if breaking your mortgage to refinance and paying an early payout penalty will save you money in the long term. If so, the prepayment penalties can be absorbed into the new mortgage loan, leaving you without any out-of-pocket expenses to pay.
How do you avoid the penalty on the existing first mortgage?
Consider leaving the first mortgage in place and simply adding a second mortgage. A second mortgage is a new mortgage which stands in second position behind your existing first mortgage. By doing this new second mortgage you are not breaking the existing first mortgage and you can save the penalty.
The key in arranging a second mortgage is to make sure you co-ordinate the expiry date of the second mortgage to match the first mortgage expiry date. This way when the first mortgage and the second mortgage comes due, you can combine both into a brand new first mortgage at the best rate and avoid all the penalties!