The relatively low-interest rates have peaked a lot of homeowners attention lately. People are still shopping for homes, but many homeowners are looking to tap into their home equity. These homeowners understand the notion that lower interest rates on their mortgage could allow them to completely restructure their finances and put them in a much better situation.
So if you found the perfect Vancouver home for sale years ago, or if you’ve been living in your Ontario dream home for some time now, you might be thinking about refinancing.
But, the decision to refinance your home is a big one. It means cashing in the equity you have accumulated over the years and using it for something that will benefit you financially in the long run. It’s nothing to take lightly.
So, what do you need to consider before you decide to refinance?
There are fees associated with a refinance. And, the first thing most people want to know when they get to the bank is what these fees are. You can assume that the cost of your refinance will be between 3%-5% of the loan.
There are a few things you need to examine when considering costs. First of all, you can roll the cost of your refinance into your loan and increase your principle. This way you pay nothing out of pocket.
Be careful of lenders who offer no-cost mortgages. More often than not, the interest rates on no-cost refinances are slightly higher than a loan that has traditional closing costs.
The most important thing you can do when considering a refinance is to shop around for rates and fees. You will find a bank that has what you need.
Refinance vs. Home Equity Loan
Don’t confuse a traditional refinance with a home equity loan. A bank will allow you to borrow the equity in your house and pay it back, with interest.
What makes the home equity loan different than a refinance is that a home equity loan is like a second mortgage and a refinance replaces your mortgage with a new loan.
You need to do your homework about which type of loan is best for your situation. Consider interest rate and term and how long you want to be paying the mortgage back. These factors along with a discussion with the bank or your financial advisor can help you make the right choice.
Rate vs. Term
A lot of people only shop interest rates when they are looking to refinance. And, finding the best interest rate is essential. But you can’t overlook the term either. If you lengthen the duration of your refinance, you will pay less each month, but you will also end up paying significantly more money over the life of your mortgage.
Make sure you the purpose of your refinance is clear. Do you hope to free up monthly income because you are struggling with your bills, or are you cashing out to build an addition?
Ultimately, you want to shop for the shortest term possible with monthly payments you can afford.
Refinancing your home is a great way to pay down debt, remodel, or add on to your home. Just remember, the key to any significant financial decision is education. Take time to familiarize yourself with all the different options out there.
Ask the loan officers questions and spend time discussing your best course of action with your financial advisor. Then, make the decision that is best for you.