Refinancing your home? Here are five things you should consider
Refinancing is a way that many Canadians consolidate their debt to take advantage of lower interest rates and reduce the number of payments they make each month.
Refinancing a mortgage allows homeowners to pay the full amount of their existing mortgage by securing a new loan. This new loan can free up some funds in order to finance big projects like home renovations or post-secondary education for the kids.
Refinancing is a great option for many homeowners, but there are several factors to think about before you move forward. Read on for a list of five things you should consider before you refinance.
1. Your credit score and debt servicing ratio
When you refinance your current mortgage, you’re basically applying for a new loan. That means there’s a chance your application could be denied if the lender feels you’re a risk.
Before you apply, it’s wise to take a look at your credit rating. If your credit score has gone down, you may not get the best rates.
When lenders look at your mortgage application, they also examine your debt service ratios. i.e.the Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio.
The GDS ratio gauges how much of your gross income is needed in order to pay your monthly housing costs (mortgage, property tax, heating bill and condo fees if applicable). Your GDS ratio should be under 32% in order to qualify for a mortgage.
The TDS ratio is the percentage of your gross income that is needed to cover your debt payments. It includes the housing costs mentioned above as well as other monthly debts such as your student loan repayments, line of credit and credit card payments and any car loans you may have. Your TDS ratio should be 40% or less.
Both these ratios play a big role in how much a lender is willing to loan you. If your ratios are high, you will likely be approved for a smaller loan.
2. Your current equity
Your home’s equity value depends on two factors. First, how much of your mortgage you’ve paid off to date, and second, how much your home has appreciated. When you refinance, you can borrow as much as 80% of the appraised value of your home minus the amount owing on your mortgage.
Let’s say your home is newly appraised at $600,000 and you have $150,000 left on the mortgage. In this case you can refinance for up to $330,000. But keep in mind that your debt servicing ratio plays a big role in how much your lender is willing to loan you when you refinance.
Using the example above, even if you theoretically could refinance for up to $330,000, your GDS and TDS ratios will impact how much your lender is willing to give you. Let’s say you recently completed an MBA program and owe $100,000 in student loans. This debt, along with your credit score, will impact how much the lender is willing to give you.
3. The cost of refinancing
Before you refinance your mortgage, it’s important to understand all the associated costs. There are multiple parts that work together to make up the total cost of refinancing. These include closing costs–whether the mortgage is closed with a lender’s in house refinance program or through a lawyer. As a part of the closing process, the applicable due diligence will be completed so that the mortgage can be funded and a new mortgage can be registered on the title to your property.
We already talked about how vital the appraised value of your home is when you refinance. A home appraiser will come to your home to evaluate the current market value of your property. This is a necessary step during refinancing.
Also, if you’re breaking your mortgage in the middle of your term, you may have to pay a penalty. Find out exactly what that penalty is from your lender. Generally, it’s equal to three months of interest.
Once you calculate the total costs that come with refinancing, you’ll have a better idea if the loan options are worthwhile.
4. The current interest rate
One of the most common reasons Canadians refinance is to take advantage of lower interest rates.
Even a one percent lower rate can save you a couple hundred dollars a month! The long-term savings with the new rate may be worth the upfront cost of refinancing.
Many homeowners are opting to refinance now so they can lock in before rates go up. Let’s say you only have a year left of your term—you may want to refinance now and lock in a good interest rate for another 5 years.
5. The right mortgage for you
When you refinance, you have the chance to select a whole new mortgage, you aren’t tied to the same lender or even the same type of loan you had previously. The best thing you can do is to consider all your options.
If you want to pay off your home quicker, now may be a good time to switch from a 25-year mortgage to a 15-year option. Or you can decide you no longer want a variable rate mortgage. You may prefer to go with a fixed rate to ensure that your payments won’t rise during the term of your mortgage.
We hope that considering these five factors will help you decide if refinancing is right for you. Then you can sign on the dotted line with peace of mind.
Another we can offer peace of mind is through the FCT refinance program, a cost-effective and quick way to refinance. Talk to your lender about the FCT refinance program today.