January 19 2016 Posted by Siemens Group
There are several reasons that people may need to refinance during their mortgage term. A few of the most common reasons are:
- To consolidate higher interest debt.
- To finance upcoming major expenses, such as education or a renovation
- To fund investment opportunities
- To secure interest savings compared to their current mortgage contract
In many cases, taking equity from your home during your existing mortgage term can be arranged without any penalty. In these scenarios, your only costs are for obtaining an updated appraisal and legal costs to re-register your increased mortgage amount at the land title office. Some lenders can even arrange an equity take out without these expenses. When refinancing to secure interest savings compared to your current mortgage there is usually a penalty associated with breaking your existing contract, but it may well be worth paying if it results in greater interest savings over the term of your new mortgage.
To calculate how much you could save by refinancing higher-interest debt into your mortgage, click here.
To calculate how much you could save by refinancing into a new mortgage at today's low rates, click here.
The Refinance Process
When refinancing your mortgage, lenders will fully underwrite your application to confirm your qualification for the increased loan amount. They will verify that your income, debt service ratios, and credit are still within their guidelines. They will also require an updated valuation of your property, sometimes through a computerized valuation system, sometimes by having an appraiser complete a full review of your property.
In many cases, the maximum Loan-to-Value ratio (LTV) permissible when refinancing is lower than when purchasing. The maximum permissible LTV when refinancing a high ratio loan (less than 20% equity) is 85%, meaning you need to retain at least 15% equity in your home. This can be compared to purchase programs requiring as little as 5%. For conventional loans (with a minimum 20% equity in your home) many lenders permit a maximum 75% LTV when refinancing.
Once approved, in most cases you will need to pay legal fees to refinance. The reason for this is that the mortgage needs to be re-registered on the title document, which requires the involvement of a solicitor. In some cases, certain lenders registger mortgages in a way that permits future refinances without legal fees. If this is a feature that you want in your mortgage, make sure you let us know while we're choosing your product.
If you remain with your current lender, you can usually avoid any penalties with the lender when taking equity out of your property by having it arranged as either a blend or as a new tier (different lenders permit different options). In either of these options, you aren't breaking the terms of your existing mortgage contract, which is why a penalty is not payable. To learn more about blends vs. new tiers, click here.
If you wish to switch your mortgage to a different lender prior to your mortgage term ending, or even break your mortgage contract and refinance with the same lender, you will usually need to pay a discharge penalty to break your existing contract.