When you purchase a house, you are entering into a substantial financial obligation intended for a long time. Mortgages commonly span 15, 20, or 30 years, It is a commitment to follow the loan terms unless you opt to sell or refinance.
Your home is likely your biggest investment. Mortgage refinancing is the best way to cash in on some of its value without selling it.
Each type of refinancing option is different, but they all work by taking out a new loan with different terms to pay off an old one.
This is how you can lower your monthly payments, take out lines of credit against your home, or even gain access to your home’s cash equity. Which type of refinance you choose and how you use it depends on your goals. In this blog, we will cover everything you need to know before mortgage refinancing.
What is mortgage refinancing?
Mortgage refinancing refers to the process of revising and replacing an old mortgage loan with a new one to secure better terms, lower interest rates, or access equity. It will offer various financial benefits and flexibility to homeowners.
To qualify for refinancing, lenders will look at various factors such as credit score, debt-to-income ratio, and employment history. A good credit score may result in lower interest rates while high income can improve chances of approval.
Benefits of Mortgage Refinancing
Here are some benefits of mortgage refinancing:
1. Long loan tenure
Choosing a longer repayment tenure indeed means getting yourself into long-term commitments and contributing more towards interest payments. However, in the case of high-value loans, at times it could be necessary to go for a long loan tenure to reduce the EMI burden. This is one of the facilities you get when you refinance your mortgage loan.
2. Save more with low interest rates
Mortgage refinancing involves applying for a mortgage, mostly with a different lender, at lower interest rates to clear your existing loan. Opting for refinancing could reduce your EMI burden due to a lower interest rate. This could help you save on interest payments that you were earlier paying against your existing mortgage loan.
3. Pay off your existing mortgage loan quickly
The primary reason to apply for mortgage refinancing is to close existing mortgage loans. You could be paying a higher interest rate on your existing loan, thus increasing your EMI burden. Refinancing would allow you to pay off your loan. Also, the EMI burden would be considerably less for your new mortgage loan.
Types of Mortgage Refinancing
If you are looking to refinance your mortgage loans, you should know the different types to know which suits you. The following are the three primary types of mortgage refinancing options available:
Rate-and-term refinancing
The borrowers can adjust the terms and conditions of the existing loan, such as interest rate or tenure. This can help individuals manage their mortgage loans.
Cash-out refinancing
It can prove to be beneficial for the borrower if he/she needs cash.
This will pay off the previous loan but lock them into a new one. The amount above and beyond the mortgage payoff is paid out in cash to the borrower.
Cash-in refinancing
Cash-in refinancing is the exact opposite of cash-out. This is an option for the borrower if a property’s market value drops below the outstanding loan amount. The borrower can repay some of the loan amounts and get another property loan of lower value.
How does refinancing a mortgage work?
Refinancing a mortgage involves replacing your existing loan with a new one that has better terms and rates. The process is similar to applying for a new home loan, and it usually requires an appraisal of the property.
When you refinance your mortgage, you can choose to extend or shorten the term of your loan depending on your financial goals. If you want to reduce your monthly payments, extending the term will help achieve this goal. On the other hand, shortening the term will increase your monthly payment but save money in interest over time.
To qualify for refinancing, lenders will look at various factors such as credit score, debt-to-income ratio, and employment history. A good credit score may result in lower interest rates while high income can improve chances of approval.
It’s important to note that refinancing comes with closing costs similar to those incurred when buying a house originally. These fees include appraisal fees, title search fees, and attorney fees among others.
Conclusion
In summary, refinancing allows homeowners to replace their current mortgage with a new one offering better terms and rates. It is also providing flexibility in choosing the length of their loans based on individual needs and goals.
This process not only offers financial advantages but also provides flexibility by allowing individuals to customize the duration of their loans according to their specific needs and aspirations.
Through refinancing, homeowners can optimize their financial arrangements to better align with their long-term objectives and enhance their overall financial well-being.
Leena Sohal, a Principal Broker, brings over 20 years of mortgage industry experience to her role as a licensed mortgage broker for the past 15 years. Starting her career with industry giants TD and CIBC, Leena established a foundation based on integrity and professionalism. As the driving force behind Max Mortgages, she is dedicated to simplifying the mortgage process for clients, offering personalized service in the ever-changing housing market.
Under her leadership, Max Mortgages, a local independent business in the Greater Toronto Area, has earned commendations for exceptional customer service, embodying a commitment to genuine assistance and lasting client relationships.
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