Financing your loan under stronger terms can save you thousands — and it may be easier than you think.
Mortgage rates fluctuate over time according to the market. If you signed your loan agreement years ago, you might be able to leverage better market rates, your home’s equity or even stronger creditworthiness by replacing your mortgage with a new one.
How much can I save by refinancing my mortgage?
If you’re able to lock in a lower rate than you’re paying now, you stand to save thousands. Say you signed a 30-year $350,000 mortgage with an average variable rate of 4.30% — the ongoing rate at the time. Each month, you’re paying $1,732 on your loan.
Now say that you’ve found a new lender willing to refinance your existing mortgage at today’s average rate of 3.54%, allowing your monthly repayments to drop to $1,571.
By refinancing, you’d save $161 a month — or almost $55,000 over the lifetime of your 30-year loan.
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Your guide to switching mortgages
What is refinancing?
Refinancing is when you apply for a mortgage to cover the amount remaining on your current loan, ideally at a lower rate or shorter term than your current one. You can refinance your loan with your current lender or start a new loan with a competing bank or nontraditional lender.
Often the main purpose of refinancing is to save on repayments. But you can also refinance to unlock equity in your property with products like cash-out refinances.
Why should I refinance?
Switching can save you money, but you stand to gain more by refinancing your mortgage:
- Pay lower interest. Generally, the lower your rate, the lower your repayments. If you haven’t looked at your existing mortgage rate in a few years, you might be surprised to learn how much over today’s average you’re paying.
- Unlock equity. If you’ve carried your mortgage for a while, you’ve likely built equity in your home. It’s the part of your property that you actually own based on how much of your loan’s principal you’ve paid down. You may be able to lower your mortgage repayments while also borrowing against your equity with a cash-out refinance.
- Pay down other debts. With some lenders, you can refinance your existing mortgage for more than you owe, borrowing the difference between the two loans as a lump sum.
- Take advantage of special offers. Banks and other lenders offer periodic incentives or signup bonuses to entice you away from your current lender. Especially in the spring “mortgage season,” you’ll find cashback incentives
- Take advantage of special offers. Many lenders offer cash incentives or sign-up bonuses to entice your business away from your existing bank. These offers are especially prevalent during the spring “mortgage season,” when you might see cashback offers of up to $2,000 to switch. Before taking the deal, make sure the loan you’re applying for offers a competitive rate, low fees or better terms than your existing mortgage.
How do I refinance my mortgage?
Learn whether refinancing can help save you money, cut down your repayment term or leverage equity in eight steps:
- Examine your current loan. Check your existing rate against today’s averages, and ask about fees to switch.
- Ask your current lender for a lower rate. Your lender may be willing to offer you a rate discount based on your research. If not, compare your options among competitors.
- Compare refinancing options. Look for a loan with a stronger rate, shorter term or other loan features you’d like to take advantage of.
- Crunch the numbers. Weigh the costs of your new loan, including any fees, against your potential new loan to learn whether it’s worth it.
- Apply for the new loan. Submit your application and supporting documents to get the ball rolling. Verification, valuation and assessments, approval and settlement can take a month or more, depending on your financial situation.
- Close your existing loan. Your new lender will work with your old one to pay off the balance of your existing mortgage and set up your new contract.
- Repay your new lender. But don’t forget to check in on the market periodically to see if you might benefit from another refinancing.
Learn more on how to refinance your mortgage
What documents do I need when switching lenders?
You’ll provide a lot of the same documentation necessary for your existing mortgage:
- Proof of your salary and other income
- Tax returns
- Mortgage statements
- Bills or contracts for other debt
- Government-issued ID
How much will refinancing cost me?
Refinancing a mortgage can be expensive, requiring upfront costs to both your old and new lender. Still, after factoring in the fees, you may still benefit from the lower rate or longer term offered by your new mortgage.
Ask both lenders about fees that can include:
- Early termination for your old loan
- Application fees for your new loan
- Ongoing fees for your new loan
When shouldn’t I refinance?
You may be better off sticking with your current mortgage if:
- You plan to sell your property soon. You may not be able to keep the loan long enough to reap the savings.
- Your mortgage is small. Any savings that come with refinancing might not be worth the interest you’ll pay.
- You still owe more than 80% of your home’s value. You may end up paying private mortgage insurance — or PMI — potentially wiping out your monthly savings.
Do I face tax issues with refinancing?
If you’re worried about taxes, speak to your accountant or a tax professional before refinancing. Generally, your ability to deduct taxes won’t change with a refinanced loan.
But taxes become more complicated with specific types of refinancing, like a cash-out refinance. Refinancing can also reduce your total tax deductions, depending on how much it saves you.
Bottom line
No matter how much research you put into your existing mortgage, it may not be the best mortgage for you now. Changing market rates, built-up equity and improved credit are all opportunities to refinance for a lower rate or better terms.
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