All About Refinancing your Mortgage

The most important advice about refinancing is: “think penalty.” There are two kinds of penalties that lenders charge when you break the term of your mortgage: (a) three months’ worth of interest or (b) the interest rate differential (IBD) -- whichever is greater.

As long as you’re aware that refinancing will entail some kind of penalty, you can apply for refinancing minus the unpleasant surprises. The size of the penalty will depend on the amount you want to refinance and how many months are left in the mortgage.

The general rule of thumb is: refinance if you can shave off at least two percentage points below your current rate. Plus, make sure that you have already built equity into your home.

If you want to refinance to consolidate your loans and you have the opportunity to trim down your interest rate, you’ll pay one amount monthly – your mortgage. By consolidating your loans, you’ll only have to focus on one monthly payment. So even if refinancing is going to increase the balance of your mortgage by a few thousand dollars (because of penalties), you could still be saving sigifincantly by reducing or eliminating your debt on other loans, such as department store credit card debt and other very high interest loans.

Before Refinancing

To refinance an existing mortgage, you generally wan to have at least 10% equity in your home. So if your home is worth $350,000, you want to have at least $35,000 in equity. The more equity you have, the better financing terms you’ll get.

Then, establish the reasons for wanting to refinance. If your main reason is to consolidate your loans, calculate the total monthly amount of all your loans. You should include car loans, credit card loans, lines of credit, loans from family, employee loans, and your mortgage. Once you’ve totaled them up, divide it by your monthly income (gross). Some lenders prefer that you obtain a figure higher than 0.50, but if the number you obtain is below 0.50, you might still qualify for refinancing.

Of course, as we’ve covered in earlier chapters, make sure your credit report doesn’t contain anything that might prevent you from refinancing your mortgage. If necessary, get an updated report and clean up any “dings” before applying.

The Basics of Refinancing

Renegotiating your mortgage is different from refinancing your mortgage. Renegotiating simply means adjusting the terms of your mortgage, while refinancing is re-applying for a new mortgage on the same property.

Remember that when you refinance your mortgage, you won’t be able to reap the rewards instantly. It will be some time before you start to realize the savings, because you’ll have to pay the penalties up-front. Ask your mortgage broker to calculate the length of time it will take for you to realize any real savings.
In home mortgage refinancing, you have four options:

• To receive cash
• To lower your interest rate
• To reduce the term of your loan
• To extend the term of your loan

The first, to receive cash, is self-explanatory. As for lowering the interest rate, it’s a good way to reduce monthly payments because the interest is lower. If you want to reduce the term of your loan you’ll certainly be paying more each month, but then again, you’ll retire (end) your mortgage sooner.

On the other hand, extending the term of your loan will lower your monthly payments – but it’ll take you longer to retire your mortgage, and you’ll pay more interest over the term.

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ABOUT THE AUTHOR:

Zack Ashan -- a.k.a. "The Mortgage Guru" -- is a licensed Mortgage Broker based in the Greater Toronto Area. Zack's personal mission is to help as many people as possible WIN the mortgage game, by providing them with clear, honest and valuable advice. Learn more about Zack and pick up his groundbreaking book "The Insider's Guide to WINNING the Mortgage Game" at http://www.mortgage-guru.ca.