What Does It Mean to Refinance Your Mortgage in Hamilton?

If you've owned your home for several years, you may have built up significant equity.

At some point, you might consider refinancing your mortgage to access some of that equity, change your mortgage arrangements or borrow money for a major expense.

But refinancing isn't simply a matter of asking your lender for a lower payment.

It can involve replacing or restructuring your existing mortgage, new qualification requirements, fees and potentially significant costs if you're breaking your existing mortgage before the end of its term.

Here's what Hamilton homeowners should understand.

1. Refinancing Changes Your Existing Mortgage

When you refinance, you're changing the financing secured against your home.

Depending on your circumstances, refinancing may allow you to borrow additional money, change the terms of your mortgage or access some of the equity you've built up.

But there can be costs involved.

If you're refinancing before the end of your current mortgage term, you may face a prepayment penalty. You may also have appraisal, legal or other administrative costs associated with the new financing.

That's why you shouldn't look only at the new interest rate.

You need to compare the total cost of making the change with the potential benefit.

2. Your Home Equity Can Be Part of the Equation

Your home equity is essentially the difference between what your home is worth and what you owe against it.

For example, if your home is worth $800,000 and you owe $400,000 on your mortgage, you have approximately $400,000 in equity before accounting for any other secured debt.

That equity may give you borrowing options.

However, having $400,000 of equity doesn't mean you can simply borrow $400,000.

Lenders apply loan-to-value limits and qualification requirements when determining how much you can borrow.

3. Refinancing Isn't the Same as a HELOC

These two options are sometimes confused.

A home equity line of credit (HELOC) is revolving credit secured against your home. You can borrow, repay and borrow again up to your approved limit.

A HELOC generally has a variable interest rate, and the amount you can borrow is subject to specific limits and qualification requirements.

Refinancing your mortgage, on the other hand, involves changing your mortgage financing and potentially increasing the amount secured by your mortgage.

Which option makes sense depends on why you need the money, how much you need, your existing mortgage and your overall financial situation.

4. You May Have to Qualify Again

This is an important point that the original article missed.

If you refinance your mortgage, you may have to pass the mortgage stress test again.

For federally regulated lenders, the qualifying rate is generally the higher of 5.25% or your negotiated mortgage rate plus 2%.

Your lender may also review your income, debts, credit history, property value and other financial information.

So don't assume that because you qualified for your original mortgage, you'll automatically qualify for a larger refinanced mortgage today.

5. Understand Why You're Refinancing

There are many reasons homeowners refinance.

You might want to:

• Fund a major renovation
• Consolidate higher-interest debt
• Access equity for another purpose
• Change your mortgage arrangements
• Reduce or restructure payments

Current CMHC research shows that renovations and improving financial health are among the leading reasons Canadians refinance.

But the reason matters.

Borrowing against your home isn't free money. You're taking on additional debt secured by your property.

6. Don't Forget About the Costs

Before refinancing, ask for a complete picture of the costs.

Depending on your circumstances, these may include:

• Mortgage prepayment penalties
• Appraisal fees
• Legal fees
• Registration or administrative fees
• Other lender charges

You need to compare those costs with the potential benefit of refinancing.

A lower interest rate, for example, doesn't automatically mean refinancing will save you money if you're paying a substantial penalty to break your existing mortgage.

7. Consider the Bigger Picture

This is particularly important if you're a homeowner who is already thinking about selling or downsizing.

If you're considering spending $100,000 on renovations and borrowing that money against your home, for example, it's worth asking whether the renovation makes sense given how long you expect to remain there.

Likewise, if you're thinking about selling in the near future, taking on additional debt secured against the property deserves careful consideration.

Sometimes the better question isn't:

"How can I borrow against my home?"

It's:

"What am I ultimately trying to accomplish, and what's the most appropriate way to get there?"

Is Refinancing Right for You?

There isn't a universal answer.

Refinancing can be useful in the right circumstances, but it also increases or restructures debt secured against your home.

Before making a decision, speak with a qualified mortgage professional about your specific situation and make sure you understand the penalties, fees, qualification requirements and long-term costs.

And if your reason for refinancing is connected to a larger real estate decision—such as renovating, selling, downsizing or buying your next home—that broader decision should be considered as well.

Sincerely,

Mike McCarthy, MBA
REALTOR®