Refinancing your mortgage can be an excellent financial strategy. When done correctly, it can help you secure a lower interest rate, reduce your monthly payments, pay off your mortgage sooner, or tap into your home’s equity. This guide will take you through a step-by-step process on how to refinance your mortgage effectively with Shelto, a premier mortgage brokerage in Canada.
- Understand What Mortgage Refinancing Is
Refinancing a mortgage means paying off your current loan and replacing it with a new one. The new mortgage can have different terms, including a different interest rate, loan amount, and repayment schedule.
- Determine Why You Want to Refinance
There are many reasons to refinance, including:
- Lowering your interest rate
- Reducing your monthly payment
- Shortening your loan term
- Switching from an adjustable-rate mortgage to a fixed-rate mortgage
- Tapping into home equity
Identifying your goal is the first step to making an informed decision.
- Check Your Credit Score
Just like the first time you applied for a mortgage, your lender will check your credit score when you refinance. The better your score, the better the interest rates you’ll be offered. Therefore, check your credit score early to understand your standing and make improvements if needed.
- Assess Your Home’s Equity
Your home equity—the difference between your property’s value and the amount you owe on your mortgage—is a key factor in refinancing. The more equity you have, the more attractive you are to lenders. Typically, you’ll need at least 20% equity in your home to refinance.
- Review Your Current Mortgage
It’s crucial to understand the terms of your current mortgage. Some mortgages have prepayment penalties that can erode the financial benefits of refinancing. Be sure to review your mortgage agreement or consult with your lender to clarify these details.
- Shop Around for Rates
Don’t settle for the first offer you receive. Speak with multiple lenders, including your current one, to find the best interest rates and terms. As a mortgage brokerage, Shelto can simplify this process by shopping around on your behalf.
- Calculate the Costs
Refinancing isn’t free. There are closing costs involved, typically amounting to 3-6% of the loan principal. These costs include:
- Application fee
- Loan origination fee
- Appraisal fee
- Title search and insurance
- Prepayment penalty (if applicable)
Before refinancing, ensure the savings outweigh the costs.
- Choose the Right Refinance Loan
Choose a refinancing loan that aligns with your financial goals. Whether it’s a fixed-rate loan, adjustable-rate mortgage, or a different mortgage term, consider the pros and cons of each option.
- Prepare Your Application
Collect the necessary documentation for the refinancing application. This often includes:
- Proof of income (e.g., pay stubs, tax returns)
- Credit history
- Assets and liabilities statement
- Current mortgage statements
- Homeowners insurance policy details
- Apply for the Loan
Once you’ve chosen a lender and a loan, you can formally apply. This involves completing the lender’s application form and providing the necessary documentation. The lender will then review your application and make a loan offer based on your creditworthiness and home’s value.
- Consider a Loan Estimate
Once you’ve applied for refinancing, the lender should provide you with a loan estimate. This document outlines the terms of the loan, the closing costs, and other essential details. Review it carefully to ensure it aligns with your initial discussions.
- Close on the Loan
If you’re happy with the loan offer, the final step is closing. At closing, you’ll sign the new mortgage agreement, pay any fees and closing costs, and the new mortgage will be put in place.
Refinancing your mortgage is a significant financial decision. Therefore, it’s important to consider your specific financial situation and goals. Working with a reputable mortgage broker like Shelto can make the process smoother and more beneficial. With professional guidance, you can navigate the mortgage landscape with confidence and achieve your financial goals.