Mortgage Refinance

What Are the Risks of Refinancing A Mortgage?

If you are a homeowner in Canada, especially on your first mortgage, it is common for you to hear people talking about “refinancing a mortgage.” According to the Canadian Mortgage and Housing Corporation (CMHC), refinancing a mortgage means securing another loan as a homeowner to pay off the prior mortgage. What this means, in essence, is that the new loan is used to get rid of the original mortgage.

Refinancing allows you to completely pay off the old mortgage fee and go for different loan terms. You can get a refinancing deal from the same mortgage company from which you got the original one or work with a completely new lender. A refinancing deal allows you to get a loan as much as 80% of the original value of the house purchased.

There are several reasons why homeowners opt for refinancing their mortgage, and some of these reasons can be of advantage. However, despite the benefits associated with a refinancing deal, it still comes with quite a few risks you might want to watch out for.Best Mortgage Online has put together some of the reasons for going for refinancing and the risk of refinancing a mortgage.

Why do Homeowners Refinance Mortgages?

Among the different reasons available why people opt for refinancing deals, here are some of the most common reasons why Canadian homeowners refinance their mortgage deals:

· Have access to equity in the home: Refinancing your mortgage gives you access to equity in your home. It allows you to access up to 80% of the total home value as a lump sum. The extra money can be diverted into other investment opportunities or for carrying out a capital project. Some of the ways of accessing this equity include breaking your mortgage or getting a Home Equity Line of Credit (HELOC)

· To consolidate debt: Mortgage refinancing gives you access to equity on your home, which can be used to consolidate debts. The equity available on homes can allow you to pay off some high-interest debts and have all your debts consolidated.

· Getting a lower interest rate: This is the primary reason many homeowners go for refinancing. You can negotiate a better deal with your new mortgage lender or plan, which can save you a huge amount of money in the long run, and this depends on the size of your outstanding mortgage and pre-payment penalty.

· Change mortgage terms: There are different mortgage options, either fixed or variable rates. Both plans have pros and cons, and switching the plan can cause you to pay penalties. However, refinancing gives you the chance to switch between the two plans without any fee attached quickly.

Risks of Refinancing A Mortgage

Despite the enticing offers that are often advertised with refinancing mortgages, you might want to take a step back and think through the entire process before refinancing. There are risks and cost implications attached to the refinancing of a mortgage.

1. There is no free refinancing: Contrary to what you might have heard from friends or believed, there is no free refinancing. The process of refinancing involves you breaking your old mortgage earlier than you bargained for, and it comes with penalties.

Breaking the mortgage earlier than agreed will involve you paying a pre-payment penalty, which is equivalent to three months of interest charges. If you are not careful, you can pay more in penalties than the amount you will save from the lower interest rate.

2. Consolidating debt can put you into more debt: The usual catchy phrase for mortgage refinancing is “consolidating debt,” which means you can pay off your high-interest debt by refinancing.

While this might be true, there is also a catch to it. Although most of the high-interest debt paid off by the refinancing plan includes credit card debt and car loans, paying them off with this plan means you are transferring your unsecured debt into your mortgage plan, which is backed with collateral – your home.

The consequence of this is that if you default on payment, you can lose your home since it serves as collateral. The consequence of non-payment of credit card debt is often limited to a bad credit score, but it can be as terrible as a foreclosure in the case of a mortgage.

3. Longer duration: Another grey area of refinancing you need to watch out for is the term involved with the new mortgage. Most mortgage plans normally last for 30 years, and refinancing involves you merging the old mortgage into the new 30 years plan. If you have fewer years to go on your old mortgage and you refinance for a new 30-year plan, you might pay higher interest rates overall. This is not a good saving strategy.

Also, if you do not plan to stay in the house for a long time, refinancing might be a terrible idea for you as you get a longer mortgage time and breaking it will cost you more money. Therefore, you need to calculate and weigh your options before deciding if refinancing your mortgage is the best bet for you.

Is There Any Bright Side to Refinancing?

Despite the risk of refinancing a mortgage, it does not make it terrible financial advice. On the contrary, there are several pros attributed to refinancing, among which are getting equity on your home or being able to consolidate your debt. Through refinancing, you can also switch easily between fixed or variable mortgages without worrying about paying any fee.

The hack to refinancing a mortgage is to take well-calculated steps towards it and ensure that you get the best deal out of the mortgage. In most cases, homeowners can negotiate better deals for their new mortgage than the previous deal. This is more efficient when you get your new mortgage from a different lender with lower interest rates and better terms.

Lastly, remember to look before leaping into a refinancing plan!

Best Mortgage Online got you covered if you need further assistance with refinancing your mortgage or getting a new lender for your refinancing plans.

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With our more than 20 years of experience in Mortgage and finance industry, Best mortgage online can help you in reducing the risk involved in Mortgage refinance.

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