Should I Refinance My Mortgage Or Renew My Mortgage?
Are you thinking of renewing or refinancing your mortgage? Have you recently encountered a change in your financial situation tempting you to revise the terms and rates of your agreement? Whether you’ve seen an improvement in your credit score or whether you need help financing a home renovation, refinancing your mortgage can be a good idea. On the other hand, if you are content with your mortgage rates and haven’t experienced a major financial change by the end of your term, a mortgage renewal might be a better option for you. At Clover Mortgage, we can help you better understand the difference between refinancing and renewing your mortgage so you can make the best decision for your own financial future.
What is Refinancing?
Mortgage refinancing in Canada is the process of obtaining a new mortgage to replace an already existing one. It allows a borrower to revise the interest rate, term and payment schedule assigned to their loan. Refinancing is often done when interest rates decrease enough to save you money on your monthly payments. However, low interest rates are not the only factor that drive borrowers to refinance. You can choose to refinance your mortgage when your financial standing or credit score has improved enough to give you a better mortgage rates. You can also decide to refinance if you want to access your home equity to fund home renovations or consolidate your debt. Similarly, a mortgage refinance can be done if you are interested in switching lenders or extending your mortgage term. All in all, there are many reasons that can drive a borrower to consider refinancing their mortgage.
Types of Refinance Loans?
Not all refinance loans are the same. If you are thinking about applying to refinance your mortgage, it is a good idea to get familiar with the different types of refinance options available.
- rate-and-term refinancing: funding is released to pay the original loan and replace it with a new loan with lower interest rates and/or extended payment options.
- cash-out refinancing: usually done when the value of the property increases. Once a home increases in value, a borrower can apply to gain access of the new value of the home without selling it. Although this option increases the total amount of the loan, it also gives a borrower access to cash without having to put the property on the market.
- cash-in refinancing: a borrower can invest a lump sum into their loan to secure a lower loan-to-value ratio or smaller monthly payments.
- consolidation refinancing: this option grants a borrower one loan with a relatively low interest rate that should be use to pay off the sum of their other debts. The rate they receive is often lower than other high interest debts or loans allowing them to save on their monthly payments.
What is a Mortgage Renewal and how does it differ from Mortgage Refinancing?
A mortgage renewal is usually done at the end of a mortgage term assuming the loan has not been paid off in full. It allows the borrower to renew their existing deal and keep their interest rate and term agreement the same.
If you are nearing the end of your mortgage term and are thinking about renewing with your current lender, it is always good to start doing your research 4 months in advance. Trying to renew your mortgage earlier than 4 months before the end of your term will result in a prepayment penalty. Even if you are not ready to sit down with your lender and sign a renewal contract, you can start researching potential rates so that you are well informed going into your negotiation. Your lender will send you an offer in the mail at least 21 days before the maturity of your term offering their best mortgage rate for you. Therefore, it is recommended that you have done enough research prior to knowing whether you can find the best rates available to you. If you are ready to accept your lender’s offer, you can lock it in 30 days before your maturity to prevent the interest rate from going up within that last month. It is also recommended that you use a mortgage renewal calculator to help you decide whether you should keep your rate the same or enter a negotiation with your lender.
Mortgage renewal is a great option for borrowers that are happy with their lender’s rates and don’t want to change their payments. On the other hand, if you are interested in swapping your current mortgage deal for a different one, outside of your mortgage renewal date, you’ll be more interested in refinancing your mortgage.
Refinance vs Home Equity Loan?
Many borrowers are confused about the difference between a home equity loan and mortgage refinancing in Canada. As mentioned above, mortgage refinancing allows you to replace your existing mortgage with another one. Borrowers can access their home equity to help finance other expenses like a home renovation, debt consolidation, or other investments. It is almost like combining two loans into one; one to replace your existing mortgage and another to help fund your other necessary expenses. If you’re not happy with your current rate, refinancing can potentially secure the best mortgage rates for your unique financial situation.
On the other hand, home equity is the difference between the value of one’s home and the amount owed on their mortgage. Home equity loans are often used when a homeowner needs help financing other investments or consolidating their debts. It’s important to remember that a home equity loan is independent of your mortgage. If you are granted one, you’ll be in charge of two monthly payments.
To sum up, home equity loans are often used to give you access to extra funding while a mortgage refinance can be used seperately to give you a better interest rate or to take out more funding. When deciding which loan is more suitable for you, it’s important to discern whether you’re interested in extended repayment options with better rates or just access to funding for other investments.
Whether you are trying to refinance or renew your mortgage, the experienced agents at Clover Mortgage can help you find the right solution. We pride ourselves on being able to offer some of the best mortgage rates in the GTA. Even if you are trying to refinance with bad credit or low income, we can find you a suitable option.
Call or text us today at 416-674-6222 or toll free at 1-800-673-2230, or email us at email@example.com to speak with an experienced mortgage broker.