The prospect of owning and financing a home can be challenging, especially for new buyers or those with poor credit. After all, the financial investment involved in purchasing a home can be expensive. For those already locked into a mortgage that has become a burden, it is important to understand that “refinancing” is not a dirty word. Refinancing your home can be a great way to save money and lower interest payments, even with mediocre or below-average credit.
What Does Refinancing Mean?
Refinancing your mortgage loan basically means taking out a new loan with different terms to pay off the original mortgage. Clients can also pay specific debts: credit card, line of credit, car-note balance, etc., or it can be to finance renovations. Basically, this means getting rid of the original mortgage by paying it off with the new loan.
What Do You Need to Qualify for Refinancing?
To qualify for refinancing you will need to meet a few requirements. In general, lenders require an LTV ratio lower than 80% (or a home with 20% equity). This is calculated by dividing the balance left on your mortgage plus any other debts secured by your property by the current value of your property.
Your lender will also assess your income and current debt or your debt service ratio. Lenders generally require your mortgage payments to be less than 39% of your gross income and your overall debts to be no more than 44% of your gross income.
Lenders may also require you to provide certain documents for verification such as a T4 slip, pay stubs, bank statements, notice of assessment, mortgage statement, or property tax bill.
What are the Costs of Refinancing a Mortgage?
Before deciding to refinance your mortgage, do make sure to factor in the fees. When you refinance, you have to pay for legal fees, appraisal fees, prepayment penalties, and potentially, a discharge fee if you decide to switch lenders. In some cases, as your broker, I will look for promotions that may exist to avoid the aforementioned fees. In general, when you break a mortgage early, you will be charged the equivalent of approximately three months’ interest or the interest rate differential (IRD) penalty, whichever is more.