Should you renew or refinance?
Should you renew or refinance?
While it's true that the Bank of Canada has provided some relief this week by maintaining its benchmark interest rate at five percent, homeowners still need to consider the possibility of increasing monthly mortgage payments when their current loans reach the renewal stage. This leads to a critical question: Should you proceed with renewing your current mortgage or explore the option of refinancing?
Over the last five years, numerous homeowners have grown accustomed to making monthly payments of around $1,800. However, they are now faced with the disconcerting prospect of their payments potentially doubling to $3,600.
What to-do?
When a homeowner decides to renew their current mortgage at the conclusion of its term, usually five years, the lender merely revises the contract by applying a new interest rate. As a result of a sequence of interest rate hikes, most mortgage holders will be confronted with a considerably higher monthly payment.
Pros:
Simplicity: it's a straightforward process that typically requires less documentation and effort compared to refinancing.
No penalties: you don't usually incur any penalties if you renew with your existing lender, but it's still essential to check the terms of your mortgage.
Cons:
Limited flexibility: you can't make significant changes to your mortgage, such as borrowing additional funds or changing the terms without going through the refinancing process.
Missed opportunities: you may miss the chance to secure a better interest rate or change the structure of your mortgage.
Refinancing involves breaking your existing mortgage and then signing a new one. This approach proves advantageous when you aim to tap into your home's equity, consolidate debts, or transition to a lender offering a more favorable interest rate and or conditions. Additionally, it affords borrowers the opportunity to prolong their amortization period, effectively stretching the length of the mortgage. This, in turn, leads to reduced monthly payments, offering relief by distributing the payments over several additional years.
Pros:
Access to home equity: you can tap into the equity you've built up in your home, allowing you to fund renovations, consolidate debt, or use the funds for other purposes.
Change mortgage terms: you can adjust the length of your mortgage term, switch between fixed and variable rates.
Cons:
Costs: refinancing can come with fees and costs, including legal fees, appraisal fees, and potentially prepayment penalties from your existing lender.
Documentation: the process can be more complex than a simple renewal, requiring income verification, credit checks, and other paperwork.
Qualification: you need to meet the lender's credit and income requirements, and if your financial situation has changed, you might not qualify for a better rate or the desired terms with another lender.
In summary, the choice between renewing and refinancing your mortgage is a pivotal decision contingent upon your individual financial situation and objectives. It's vital to meticulously assess your choices and consult with a mortgage broker for professional guidance in determining the optimal option to meet your needs.
If you find yourself unsure, or even stuck, don't hesitate to reach out to Fred and Martin Mortgages by phone or email. We're here to guide you through the advantages and disadvantages as previously discussed. The best part, it’s free and could save you thousands of dollars.
Fred and Martin