The Pros And Cons Of Mortgage Refinancing

Whether you are looking to tap into your home’s equity, cut monthly costs, or reduce interest rate, by choosing to refinance your mortgage you can do all of that — and more. But how difficult is it to replace the previous mortgage you have with a new one? And how can you make sure that lenders in BC will give you the best possible deal?

If you want to find out whether you are eligible for a mortgage refinance, and if you are ready to get the best possible rate in British Columbia, the following recommendations will prove valuable.

When Should You Refinance Your Mortgage?

Getting a low refinance rate is a science that not everyone knows how to approach right. Certain strategies work, others don’t, and without the step-by-step guidance from an experienced mortgage broker, refinancing your mortgage might not always be a good idea. As each borrower’s situation is different, and the stakes are high, before you begin the refinance process, you need to have a clear idea of why you want a refinance in the first place. Most common reasons include:

Reducing Monthly Payments – Refinancing your home loan can help you reduce your monthly payment if you can qualify for a lower interest rate, or go without mortgage insurance.

Paying Off The Loan Faster – While opting for a shorter term loan may increase your monthly payment, it will also allow you to pay the debt faster, and help you save money on interest.

Switching To A Fixed Rate Loan – When refinancing, certain mortgage lenders will offer borrowers the option of switching from an adjustable loan, to a fixed-rate one.

Tapping Into Equity – A cash out refinance offers you access to equity cash. This involves of course that you need to take on a larger mortgage.

What Is The Downside Of Refinancing Your Mortgage?

There are many advantages to getting a mortgage refinance. But what about the downsides? Are there any disadvantages borrowers that are ready to refinance should know about?

To get the best interest rates from most traditional lenders in BC, you need to have a good credit score and a low debt-to-income ratio. And although having a less than ideal credit score or above-average DTI doesn’t necessarily mean that you can’t refinance your mortgage, it usually means that you won’t be able to get the best loan options, and maximize your savings.

Other than that, when mortgage rates are falling, many borrowers tend to chase after lower rates. But each time you pay a new round of closing costs, that costs will be cut into, or even exceed the savings made from refinancing. Saving money is the number one reason people think of refinancing. But keep in mind, you won’t save much unless you get a lower rate or if you can save that full percent (or more) that makes refinancing worthwhile. Even with costs in your favour, you will still have to deal with mortgage refinance lenders that are less willing to take on risk mostly because of the future market uncertainty caused by the coronavirus pandemic.

If you choose to work with a private lender, the process of refinancing your current mortgage will be much easier. While banks focus primarily on the applicant’s credit history and income, private lenders in Vancouver are more interested in the cash-to-value ratio of the loan, versus the tangible asset. And where traditional lenders require endless financial documents and cumbersome procedures, alternative mortgage lenders will usually finish the process in a matter of days.

Does Refinancing Hurt Your Credit?

Getting a refinance on your mortgage won’t have any negative impact on your credit. It’s true that taking on a new loan will typically cause your credit score to dip. But since refinancing replaces an existing mortgage with another one of roughly the same amount, the impact on the borrower’s credit score is usually minimal. When the refinance is finalized, your new loan amount will appear on your credit report, and your payments toward it will be tracked. Your original mortgage will remain on your credit report as well, marked as “closed in good standing”.

What Are Your Mortgage Refinance Options 

For most borrowers in BC, there are three main mortgage options when they plan to refinance their loan:

Traditional Refinancing – Traditional refinance is designed to reduce your interest rate, lower your monthly payment, and/or reduce your loan term.

Cash-out Refinancing – A cash-out refinance takes advantage of the equity you’ve built over time and gives you cash in exchange for taking on a larger mortgage.

Cash-in Refinancing – Unlike cash-out refinancing, with a cash-in refinancing, the borrower uses cash for a new mortgage with a lower loan balance than the initial loan. Cash-in mortgages may result in a lower mortgage loan rate, a shorter term, or both.

How To Get The Best Refinancing Package

Get Your Credit Score In Check 

Lenders offer the best rates to borrowers who have good credit scores, a low debt-to-income ratio and a track record of paying their bills on time.

Work With A Reputable Mortgage Broker

Mortgages can take up a large chunk of your monthly outgoings if you don’t get the best deal. That’s why mortgage brokers are well worth talking to when you want to refinance your mortgage. When shopping for refinancing deals, an experienced and competent mortgage broker can help you find the best terms and rates. Thanks to the special relation they have with both traditional and b-lenders, created mostly by the volume of business they generate, brokers may also be able to get special rates that might be lower than you can get on your own.

Your broker may also save you legwork from the hours and days it would take you to apply for different loans. There is also the back and forth communication involved in these applications ensuring the process is on track. However, mortgage broker advice saves the hassle of dealing with these details, by communicating with the lenders on your behalf.

Choose The Best Lender

Home loans vary from lender to lender, and no lender will offer low rates to everyone who wants to refinance their mortgage. Your mortgage broker can help you find the most beneficial refinance for your situation by narrowing down the lenders list and getting quotes from them for the same type of loan. It should also advise you on working with lenders that other than a low interest rate can also offer you low closing costs, a strong track record and delivering on any promises, and great customer service.

Refinancing With Your Bank

The first stop on your way to refinance a mortgage is generally the current bank you are with. This may become difficult depending on what institution you use in Canada. Banks are required to underwrite mortgages on B20 risk guidelines. These guidelines require credit & debt servicing ratios along with a qualifying rate which can disqualify borrowers that may have qualified a year ago.

Refinancing With a B-Mortgage Lender

If you are close to renewal of your 1st mortgage and have bad credit a B-Lender has products enabling home owners to consolidate debts with lower credit scores and income types. Rates are higher than conventional mortgage lenders like banks but where banks fall short B-Lenders fill a gap. Generally, B-Lenders are used for shorter terms like 2 or 3 years.

Refinancing With a Home Equity Lender or Private Lender

Home equity lenders allow homeowners with enough home equity to refinance their mortgage with bad credit.  Equity lenders provide 1st, 2nd & 3rd mortgages to homeowners in BC regardless of their credit rating. Home equity loans in some cases can be a cheaper alternative than refinancing your entire mortgage.

Home equity lenders offer Second Mortgages, and, in most circumstances, this is a far cheaper alternative than refinancing a bad credit mortgage as a 1st Mortgage.

When holding a 1st mortgage you have qualified for this mortgage at a great rate. In a market where rates are going up it is usually better to hold most of the mortgage at the best rate possible and obtain a 2nd mortgage to consolidate all the bad credit & other debts.

The use of a blended rate calculator can help you determine savings.

Alternative Solutions To A Mortgage Refinance 

Home Equity Loans 

Instead of refinancing your mortgage, if your income got impacted by COVID-19 and you own a property, a private lender can help you consolidate debt and increase cash flow by simply accessing the equity you have saved up in your house. The amount you can borrow is based solely on the amount of equity you have in your home, and doesn’t take into account your income or credit score as in the case of banks.

Our lenders have no restrictions on how you might use your mortgage, so whether you want to pay off a loan, your credit card debt or even make home renovations, that’s up to you! One more thing you should consider in favour of taking a home equity loan instead of refinancing your mortgage is the IRD penalty. Interest Rate Differential or IRD Penalty is a penalty you would need to pay for breaking your obligations with the bank. When working with A-Lenders, a fixed mortgage term will not allow you to make any changes like paying out or refinancing during your term. Penalties can be quite large in these types of situations, which makes working with B-lenders more desirable.

Second Mortgages

When working with the best lenders in Canada, second mortgages are just as easy to get as the first one, and they are a great alternative to a mortgage refinance. A second mortgage is a new loan you can take, based solely on the same home ownership title, which allows you to refinance up to 70% of your home’s value. As in the case of home equity loans, a second mortgage can free up money for your working capital, can give you more cash flow during the coronavirus crisis, or can assist you with payments over the term of your mortgage. It is a great tool too for repairing your credit.

Bridge Financing

A bridge financing loan allows you to access the equity in your current home for buying a new property. Banks do offer bridge financing, but your primary home must be sold and closing generally must take place 30 to 45 days after completing. When you apply for bridge financing through us, you can take all the time you need. Moving out from your old house before taking possession of your new one will not need to be a reason to stress anymore, and you can even have money leftover for renovations and buying furniture.

Debt Consolidation

Looking to consolidate debt into one low payment? With the equity you own in your home it’s easy to do that too. As the debt is secured against your ownership in the property, our lenders can offer you attractive low interest rates that you can choose to pay at your own pace.

The Smart Way To Refinance Your Mortgage 

The only person who can decide whether a mortgage refinance, either with traditional or private lenders is a good idea, is you. And no matter how low mortgage rates might be, your situation (not the market) should be the main factor in whether or not you refinance.

To be sure that you are making the right choice for you and your family, it’s wise to discuss with a professional mortgage broker who can advise you on your decision. Choose someone who you can trust and from whom you can be sure that you are getting an unbiased answer.