How Does Refinancing Work?

Refinancing is the process where a homeowner arranges to have the existing mortgage on the house (as well as any other legal claims against the property) paid off and replaces the mortgage with a new one. There are several reasons why you may want to consider taking this step, such as:

  • Taking advantage of lower interest rates
  • Financing the purchase of an investment property
  • Freeing up funds to pay for a child’s or grandchild’s education
  • Financing the cost of starting a business
  • Financing the cost of purchasing investments
  • Using the money to finance a renovation
  • Refinancing your home to consolidate debt and increase cash flow
  • Refinance a first and second mortgage into a single mortgage

Is your Mortgage Open or Closed?

Whether you are interested in borrowing additional funds or not, you need to consider whether you have the option of breaking your mortgage contract before it is up for renewal. With an open mortgage, you can renew or pay off your mortgage at any time without paying a penalty. If you have a closed mortgage, you will have to pay a penalty (usually three months’ interest but may be higher depending on the terms of your mortgage contract) to break the mortgage early.

If you have less than six months left on a closed mortgage and your refinancing needs are not urgent, you may want to wait until you have about three months left in your term to start looking at your refinancing options.

Loan-to-Value Limits for Refinance

The loan-to-value (LTV) refers to the relationship between the balance on your mortgage and the property value of your home. If your home is valued at $350,000.00 and your existing mortgage is $200.000, your LTV is 57 percent ($200,000.00 divided by $350,000.00). You can borrow up to 80 percent of the LTV of your home when you decide to refinance it.

To start the process of refinancing your home, contact Mark Price. As an experienced mortgage broker, he can review your existing mortgage documents and help you understand the terms of your existing loan and how much it will cost you to break your mortgage contract. If you want to go ahead and find a lender, he will shop the market for you to find the best combination of low rates and favourable terms.

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