The Learning Centre:
How refinancing your mortgage could help save money, increase cash flow, and consolidate debt
(Reading time: 3:30)
Your mortgage is one of the biggest financial commitments you’ll ever make.
At the start of that commitment, you typically select the kind of mortgage that works best with where you are in life (and in your education career). But life is never static. Circumstances and financial situations change. Sometimes to the point of having to completely re-evaluate or even break your current mortgage commitment.
That’s when refinancing usually comes into play.
With a mortgage refinance, you’re in effect ending one mortgage commitment and beginning another. That new mortgage comes with an entirely different set of terms, costs, and conditions. So while the road to refinancing may be paved with good intentions, if it’s done without a plan (or an understanding of how it will impact your finances in the long term), your decision to refinance might not actually be prudent.
So how do you ensure that a mortgage refinance actually works in your favour?
According to Educators Agent-Regional Director Chris Knoch, the key is in being forward thinking.
“When education members contact me about the possibility of refinancing, many times it develops from a desire to solve an immediate cash flow crisis,” says Chris. “While it’s a very valid reason to contemplate a refinance, particularly when you consider what’s been happening in recent months, refinancing to fill a one-time financial need may not be the only important financial consideration. Refinancing should be viewed as a ‘forward thinking’ solution.”
Chris goes on to elaborate as to what that means.
“For example, if you were refinancing in order to provide more flexibility in your monthly budget, go one step further by identifying specific expenses that you might see yourself having to cover (future needs such as replacing your roof, furnace/air conditioner, or car). By being forward thinking in your approach to refinancing, you will minimize the potential drain on your wallet caused by any big-ticket repairs that may crop up in the not-too-distant future. Ideally, a mortgage refinance is something that should be done only once.”
Next, be sure that refinancing is the right solution for your specific situation.
With 50% of Canadians on the brink of insolvency in 2020, refinancing could mean the difference between many homeowners being able to keep their home and having to sell it.
However, you can also benefit from refinancing your mortgage in the following ways:
- Tapping into your home’s equity for upgrades and/or renovations
- Securing a lower interest rate in order to pay your mortgage off faster
- Consolidating multiple high-interest debts into one monthly payment
- Using equity in your home for investments
There are also a few things to consider before you refinance—starting with the cost.
If you’re refinancing your mortgage prior to the end of the term, the amount of the penalty will need to be determined. In addition, there are other items that make up the total cost of refinancing including:
- Home appraisal fees (although Educators will reimburse this upon funding)
- Title insurance fees
- Title search fees
- Legal fees
Your credit history and debt-servicing ratio will also be key in determining components of the loan.
Since a mortgage refinance basically involves applying for a new loan, our mortgage agents will examine both of these elements to examine any potential hurdles and determine your eligibility.
- Credit Report: not only your credit score but your entire history will be examined
- Debt-servicing ratios: determines the maximum loan amount based on confirmable income
Finally, determining how much equity you have in your home will mandate the maximum amount you can borrow as part of the refinance.
Equity in your home depends on two factors—how much of your mortgage you’ve paid off to date and how much your home has appreciated in value. When you refinance, you can borrow as much as 80% of the appraised value of your home, minus the amount owing on your mortgage.
Have a question about refinancing? Our mortgage agents have the answers.
Whether you’re shopping around for your first mortgage, or are looking to renew/refinance your existing one—reach out to Educators Financial Group. No matter where you are on the pay grid or what your pension income is in retirement, we can offer you a mortgage solution that fits your specific needs and budget.
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