Mortgage Refinace

If you already have a mortgage...


...then you may wish to refinance your property to make financial profit. Refinancing means to re-negotiate (i.e. to change the contract of) an existing mortgage in some fashion. This can be done, for example, for the following purposes:

  • To reduce the rate of interest. Usually, that happens in the situation when you have a subprime mortgage (a mortgage for borrowers with damaged credit) with a high interest rate, and after a year or two you have established a good credit rating and are looking to refinance to get a lower rate with a traditional mortgage. That will save you tons of money.

  • To increase the amount of the mortgage (i.e. to borrow more money) - for example, for buying a car (car dealers' loans cannot compete with mortgages regarding rates), consolidating debts (rates of credit cards are simply killing!) or using the taken amount as a down payment for an investment property (for example, buy a condo where you will live after retirement, leaving your current house to your child - very smart strategy in an expensive magapolis like GTA). If the penalty for early cancellation of your mortgage is too high, then you can borrow more money without breaking your existing mortgage, i.e. to take another loan which will be registered on your property as the 2nd mortgage.

  • To shorten the mortgage length (amortization period) by increasing the size of your payments (if that solution has become affordable). That will save you tons of money.

  • To decrease the size of your payments (if they have become unaffordable) by increasing the mortgage amortization period (like from 25 to 30 years). Consider that as a temporary arrangement. Later, when your economic situation improves, you will be able to accelerate or increase payments (that will shorten the amortization period back), or refinance back as described in the previous paragraph.

If you decide to refinance DURING THE TERM...


...and your current mortgage is Open, you can refinance (by switching to another lender - a lender which offers you the best conditions) without any penalty.

But if your current mortgage is Closed, then you may have to pay a penalty to the curent lender for repaying the mortgage before the end of the term. The penalty to fully prepay the mortgage may outweigh the benefits of refinancing with another lender - the cost of the penalty may be more than the amount saved by refinancing at a lower rate. I can help you to make a decision using financial calculations.

Please refer to Permissions to Pay Off Mortgage Faster for more details.

Is Refinancing a Good Idea?


Article by John Hester in AreaOfEntrepreneurs.com:

Over the past few months, mortgage interest rates have fallen to the lowest level ever. While mortgage rates for all types of mortgages are extremely low, the credit crunch has made getting a mortgage has become far more difficult than it was even a few years ago. Furthermore, getting a mortgage now is quite expensive as it comes with historically high origination fees and mortgage points. Because of this, there are several considerations to take when deciding if mortgage refinancing is a good idea.

The first consideration to take when considering mortgage refinancing is your current credit situation. Mortgage lenders have drastically tightened their lending practices to people with bad credit.

To get the best possible rates, you will now need a credit score of at least 740. If you score is less than 660, you will have a difficult time getting any mortgage at all. If your credit score is poor, spending the money to apply for the mortgage refinancing could be a waste of money. Instead, you would be better off paying down your account balances and checking your balance again in a couple years.

The second consideration to take when considering mortgage refinancing is how much money you have left on your mortgage. Spending the money to lower your interest rate makes the most sense when your mortgage balance is high and your current LTV [Loan-To-Value, i.e. the ratio of the value of the debt to the value of the house - Michael Zuskin] is 80% or more.

If your mortgage balance is far less than 80% LTV [i.e. you owe to the bank less than 80% of your property price on the current market - Michael Zuskin], then spending the money to lower your rate may not make financial sense because only a small amount of your mortgage payment will go towards interest anyways.

The third consideration to take when considering mortgage refinancing is how long you plan on keeping the mortgage.

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