Refinance a Mortgage

Has your credit score improved since you took out your mortgage? Are you looking to lower your monthly payments and save money? A mortgage refinance could be the perfect solution to free up some space in your budget. Keep reading to learn how refinancing your mortgage can benefit you.

What Does Refinancing a Mortgage Mean?

• Refinancing a mortgage simply means replacing your existing loan with a new one that has different terms. In other words, you pay off your original mortgage with the new loan, and then you make payments toward the new loan instead.

  With a mortgage refinance, you have several options:

  • Lower your interest rate and adjust your loan term (either longer or shorter).

  • Switch from a fixed-rate to a variable-rate mortgage, or vice versa.

  • Access your home’s equity through a cash-out refinance. This involves taking out a loan for more than you owe on your current mortgage, allowing you to use the extra funds to consolidate debt or invest in home improvements.

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What Do You Need to Qualify for Mortgage Refinancing?

To qualify for a mortgage refinance, you'll need to meet a few key requirements. Generally, lenders will evaluate the following criteria:

• LTV Ratio or Equity – A loan-to-value (LTV) ratio of less than 80% (meaning you have at least 20% equity in your home). This is determined by dividing your remaining mortgage balance, plus any other debts secured by your property, by the current value of your home.

• TDS Ratio – Your Total Debt Service (TDS) ratio, which reflects your income and current debt load. Lenders typically require your mortgage payments to be no more than 32% of your gross income, and your total debt payments should not exceed 40% of your gross income.

• Credit Score – Most traditional lenders, especially banks, will want your credit score to be at least 650. While some alternative lenders may have more flexible credit score requirements, it's always best to refinance with a strong credit score. Be sure to check your credit score before applying and take steps to improve it if needed.

Steps to Refinance a Mortgage

If you decide to refinance your mortgage, there are several key steps you'll need to follow to complete the process:

1. Complete Your Application to Refinance

To begin the refinancing process, you'll need to submit a new loan application to your lender along with relevant documentation so they can assess your eligibility. Before applying, review your finances to ensure you meet the lender's minimum requirements, such as credit score, debt levels, income, and equity in your home.

Documents Needed to Refinance a Mortgage: Your lender may request proof of income, proof of employment, and tax documents, such as your Notice of Assessment (NOA). Additional documents might include T4 slips, pay stubs, bank statements, mortgage statements, and property tax bills for verification.

2. Compare Your Options

It's important to compare different mortgage refinance options before settling on a lender. If you have poor credit, consider working with a mortgage broker who can connect you with a suitable B-lender. A broker can help you navigate through multiple lenders to find the best deal based on your financial situation.

3. Wait for a Response

Once you've submitted your application and all necessary documents, your lender will begin the underwriting process. If approved, you'll receive a document outlining the terms and conditions of the loan.

4. Review the Agreement

Before signing the refinance agreement, carefully review all the details, such as payment amounts, interest rates, fees, and any penalties for late payments or early repayment. If everything looks good, sign the agreement to finalize the process.

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What Are the Costs to Refinance a Mortgage?

Before refinancing your mortgage, it’s important to factor in the associated fees. When you refinance, you may incur several costs, including legal fees, appraisal fees, administration fees, prepayment penalties, and possibly a discharge fee if you switch lenders. Additionally, if you break your mortgage contract early, you’ll typically face a penalty. The penalty is usually either three months’ interest or the interest rate differential (IRD), whichever is higher.

Prepayment Penalty
If you pay off your mortgage early, you may face a prepayment penalty. The fee could be either three months' interest on your remaining balance or based on the interest rate differential (IRD) model.

Discharge Fee
If you switch lenders, you may be charged a discharge fee, which can be around $350 or more.

Legal Fees
If you hire a lawyer to assist with the refinancing process, you can expect to pay approximately $1,000 for their services.

Appraisal Fees
To have your home appraised, you’ll need to pay an appraisal fee, typically between $100 and $300.

What Are the Pros of Refinancing a Mortgage?

Lower Monthly Payments
Refinancing can extend the length of your loan, which may lower your interest rates and result in reduced monthly payments, giving you more cash flow.

Shorten Your Mortgage Term
If refinancing lowers your interest rate and monthly payments significantly, you might be able to shorten your mortgage term by paying a little extra each month, while still paying less than you originally did.

Access More Cash
By refinancing, you replace your current mortgage with a new one, and you may choose to take out a larger loan. This can free up cash that you can use for home renovations or other expenses.

Choose Between Fixed or Variable Rates
Refinancing allows you to switch between a fixed-rate or variable-rate mortgage, depending on what suits your financial situation.

Consolidate Debt
If you refinance by taking out a larger loan than your current mortgage, you can use the extra cash to consolidate debts, freeing up more financial space.

What Are the Cons of Refinancing a Mortgage?

Longer Loan Period
Refinancing can extend the length of your loan. For example, if you have 25 years remaining on a 30-year loan and refinance into another 30-year mortgage, you’ll extend your mortgage term to 35 years.

Additional Fees
Refinancing can incur extra costs, such as legal and appraisal fees, that might not be fully offset by the savings from lower interest rates.

Possibly Taking Out a Larger Mortgage
If you use the refinance funds to cover new costs, your loan balance could end up being larger than necessary, increasing your overall debt.

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Can You Refinance a Mortgage with Bad Credit?

Mortgage refinancing can be a great way to reduce your monthly payments and save money, but what if you have poor credit? The answer is yes, refinancing is still possible, though it may be more challenging. Here are a few tips to help improve your chances:

Make Your Application Stand Out

Refinancing with a low credit score can make approval more difficult, so it’s crucial to present a strong application. Ensure you provide all required documentation, such as pay stubs, tax returns from the previous year, and any other supporting information.

If you’re expecting a raise or promotion, request a letter from your employer confirming the increase in pay. A stable work history can also strengthen your application, so consider obtaining a letter from your HR department that verifies your tenure with the company.

Final Thoughts

Refinancing your mortgage can ease the burden of your current loan by lowering your interest rate and monthly payments. In some cases, it may even allow you to pay off your mortgage faster, depending on your income. However, it’s important to remember that refinancing can be complex, so keep these tips in mind when deciding. If you’re confident that refinancing is the right choice for you, ibeloan.com can help connect you with a trusted mortgage specialist.

Increase the Equity in Your Property

A key factor for most lenders is the equity in your home. If you owe more on your mortgage than your home is worth, refinancing can be more challenging. Lenders base their decisions on the market value of your property, and without enough equity, the investment is seen as high risk.

Lenders have varying requirements for equity, so be sure to research different options. Some lenders may require you to have 25% equity in your home, while others may accept 5% to 10%.

Understand Your Break-Even Point

Refinancing isn’t always as straightforward as swapping a 5% interest rate for a 4% one. Closing costs and fees can add up, making it important to weigh these expenses against potential savings. As a general guideline, refinance only if you can reduce your interest rate by at least half a percent, though the more you save, the better.

Explore Government-Backed Loans

In Canada, government-insured loans are available, offering more lenient terms for homeowners with poor credit. These loans typically require lower down payments and less equity, making it easier to refinance. The Canada Mortgage and Housing Corporation (CMHC) provides valuable resources to help you assess your financial situation and decide if refinancing is right for you. While there are restrictions on these loans, they also offer numerous benefits for borrowers.

You may also want to explore the RRSP Home Buyers’ Plan, which can assist in securing a mortgage.

Set Realistic Expectations

If you have poor credit, it’s essential to manage your expectations when refinancing. If you’re refinancing with the same lender, you might not be offered the lowest available rate. For those with bad credit, working with a mortgage broker who can connect you with alternative lenders is often a better strategy.

Is Refinancing Right for You?

Refinancing may not be a good idea if your home has lost value, as the new loan will be based on your property’s current worth, potentially resulting in a smaller loan than your original mortgage. However, refinancing can be a smart move if:

• You’ve built equity in your property

• You have a strong payment history

• You want to reduce your monthly payments

• You want to switch from an adjustable-rate mortgage to a fixed-rate mortgage

Refinancing a Mortgage | FAQs

How Long Does It Take to Refinance My Mortgage?

Typically, refinancing a mortgage takes between 2 to 4 weeks. However, this timeline can extend if your lender needs additional documentation or if the property valuation process takes longer than expected.

When Is the Best Time to Refinance My Mortgage?

The ideal time to refinance is usually at the end of your mortgage term to avoid prepayment penalties. However, the best time to refinance will depend on your unique financial situation and goals.

How Much Can I Borrow When Refinancing My Mortgage?

Most lenders allow you to refinance up to 80% of the equity you’ve built in your home. For example, if you have $150,000 in equity, you could potentially borrow up to $120,000 (80% of $150,000).

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Note: ibeloan.com does not arrange, underwrite, or broker mortgages. We serve as a referral service to connect you with mortgage specialists.

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