Refinancing really comes in handy as you can choose the terms and rates for your new mortgage. With most first-time traditional mortgages, the rate is likely decided for you, thanks in part to the impatient process of house buying. If you’ve moved out, and are now planning on purchasing a house, you’re not going to necessarily wait for the market to decrease mortgage interest rates. Refinancing is often called no-rush, as it allows you to wait until rates are low, no matter the time left on your mortgage. Whenever rates are pushed lower than your original mortgage, you can borrow an amount that pays off the remaining part of your original mortgage, with lower interest.

How does home refinancing work?

As with applying for mortgage with a home in mind, refinancing revolves around applying for, and getting accepted for a mortgage. When you buy a house, you get a loan with a set length, and either a fixed interest rate or one that varies with the market. That’s the same with home refinancing, as it’s just another strategic loan. However, instead of going to the home’s seller, this loan goes to the loaner to pay off your original mortgage.

Home refinancing still requires you to analyze terms and rates, apply to, and qualify for a loan. After all, you’re still applying for a mortgage, just for a reason other than purchasing a home. Refinancing mortgages will still require you to meet a lender’s requirements, filing an application, going through the underwriting process, and closing the deal. However, once it’s done, preferably at a lower rate, you can use the cash influx to immediately pay off any outstanding debt on your mortgage.

Why should I refinance a home mortgage?

There are several major reasons to refinance a home, but we’ll focus on a few of the major ones. These would be to:

• Reduce mortgage payments: if you’re planning on spending less on your mortgage, whether monthly or overall, refinancing is great. Being accepted for a lower interest rate will save you money both over the long-term and short-term horizons, but you can also apply for a longer mortgage. While you might spend equally as much, or more, increasing your term length from 15 years to 30 years will still save you monthly. You’ll probably spend more on interest, but month-wise, it’ll be cheaper.
• Access home equity: refinancing a home doesn’t just allow you to pay off your home mortgage. It can also theoretically allow you to gain access to the equity, or value, of your home. By cutting off the mortgage debt associated with your home, you’ll be able to borrow more money, at a lower rate. This is oftentimes called a cash-out refinance, as the lender will give you a check for the amount you borrow over your loan. Oftentimes, people try to receive a cash-out refinance alongside some low interest rates.
• Switch from a variable to a fixed interest rate: if interest rates are falling, or extremely high, people oftentimes get a variable rate, which would allow them to pay less on decreasing rates. Variable rates follow the market, meaning increasing rates mean increased payments for you. The issue is, when rates get low enough, it’s almost a guarantee they’re going to rise alongside your interest payments. That’s why many people switch to a fixed interest rate refinancing loan, allowing you to get a fixed incredibly low rate to replace your uncertain variable rate.
• Pay off loans faster: home mortgages usually take either 15 or 30 years to pay off, depending on which one is signed. While 30-year mortgages are cheaper month by month, in the end, you end up paying more interest, as nearly double the interest period has passed. Many people refinance a 30-year mortgage for a 15-year mortgage, even though it’s more expensive monthly. In the end, you could potentially be saving thousands, even with higher monthly payments. Plus, you have 15 years less to worry about paying your mortgage on time.

Home Refinancing Example

As with the first reason to apply for a refinancing loan, most people get a refinanced mortgage in order to pay less on interest. Here’s an example as to how that may work:

Let’s say you’ve bought a house for $700,000, the median Canadian house price. You’ve made a 20% down payment of $140,000 to get the best rates possible and took out a $560,000 mortgage for the rest. The issue is your mortgage was variable rate. At the time, rates were at a several years high of almost 15%. Rates have now fallen under 2%, and you want to keep it that way. So, you decide to refinance your home’s mortgage to a fixed-rate loan. Let’s take a look at how that would work.

1. Your original loan balance, with Lender O, is $550,000, as you’ve already paid off $10,000.
2. You browse as rates settle at lows, finding Lender N, with a new interest rate lower than your original loan.
3. You apply for a fixed-rate mortgage with Lender N at 2%, asking for a total of $550,000.
4. Lender N accepts your application, in addition to giving you your low fixed rate.
5. Lender N then pays the $550,000 to Lender O, leaving you with $0 debt with Lender O.
6. Now, you have cheaper monthly payments for Lender N.
7. While you still have a total of $550,000 to pay off, the monthly payments are lower, and your very-low fixed interest rate is protected from future rate increases.

You can even theoretically set up a refinanced loan with your original provider, although it’s almost always better to go to an outside source. For example, Mortgage Zilla Group can take care of that, getting you a great refinancing loan with a lower rate. We can connect you with a better lender with lower interest rates and better options, oftentimes ones that you might not be able to find without digging deeper.

Types of Home Refinance Mortgages

• Rate and Term Refinancing:
  1. This is the most common type of refinancing mortgage, letting homeowners change their loan’s mortgage rate, loan length, or both. That’s why it’s named rate and term refinancing.
  2. For example, you can refinance from a 30-year to a 15-year mortgage, or vice versa; from a 30-year, 8% fixed-rate mortgage to a 30-year, 2% fixed-rate mortgage; from a 30-year fixed-rate mortgage with an 8% interest, to a 15-year variable loan currently at 3%.
  3. These loans are focused on saving you money, whether in the form of a reduced monthly payment, or less interest paid overall.
• Cash-Out Refinancing
  1. Cash out refinancing mortgages focus on tapping into your home equity. These loans are usually larger than the remaining amount on your original mortgage, meaning that your lender gives you the remainder in cash. As these are backed up by the equity in your home, it’s usually at a lower interest rate.
  2. For example, rate and term refinancing focuses on addressing your current loan, drawing cash to pay that off. Cash-out refinancing focuses on providing an equity (home value) based loan in order to pay off a current mortgage in addition to adding some cash influx. Let’s say you have a $600,000 house. Your remaining loan balance is $250,000, so you draw a $300,000 (50% home equity) loan to pay off that loan. When it completes, you’re left with $50,000 in cash.
  3. These loans are generally to tap into equity, potentially saving you money in the long run. Cashing out is much more liquid, although the cash portion might be smaller than with other loans. You might also be required to leave 20-25% of your home equity untouched.
• Cash-In Refinancing
  1. Cash-in refinancing is a mortgage where you bring cash to pay down your new loan balance. If you negotiate a new loan with a new lender, you might bring cash in order to partially pay off your new loan.
  2. For example, you might get a $300,000 loan to cover your current mortgage. At a lower interest rate, you can potentially bring money to reduce the future loan payments to, say, $200,000. You’d likely save some money in reduced insurance and premiums.
  3. These loans are for people with extra cash they’re willing to pay part of their new loan off with. Paying off part of this loan upfront will save you more money than putting it towards your current mortgage with a theoretically higher interest rate.

No matter the refinancing option you choose to take, it’s important to remember that you’re likely going to be evaluated off of your credit score, history, income and employment, and current equity and asset value. It can be hard to find a suitable refinancing lender, which provides great rates for you. That is why Mortgage Zilla Group is here to help make sure that you can get a great refinanced mortgage. Without the right knowledge or skills, there’s a big chance that you’re not getting the best deal for you. We’ll take care of the hard work, removing the unnecessary stress and issues that could arise during refinancing.