As a Mortgage Agent one thing I have noticed when dealing with clients is that many people confuse the words renewal and refinance as they pertain to mortgages.
I would like to break down the basics of what refinancing a mortgage means and what the steps are to go through the process of refinancing a mortgage. I will then explain what it means to renew a mortgage and what is entailed with that process.
There are many different reasons why someone would want to refinance their mortgage. This can become an option when there is equity built up in a home. Refinancing allows borrowers to take out a loan that can be as much as 80% of the appraised value of their home. It is typically a much better option than taking out a random loan as the interest rate will be much lower.
There are options to how the refinancing would be set up. It could be a primary mortgage, secondary mortgage and/or a Home Equity Line of Credit (HELOC).
A Second Mortgage
- With a second mortgage you can borrow up to 80% of the appraised value of your home minus the balance still owing on your mortgage.
- The loan is then secured against the equity in your home and you will then have monthly payments for your first mortgage as well as payments for your second mortgage.
- Interest rates can be slightly higher on a second mortgage
- There are also administrative costs for appraisal fees, title search and legal fees
A Home Equity Line of Credit (HELOC)
- This works similarly to an unsecured line of credit but the HELOC is secured against your home.
- It is there to use as needed and can be paid back and borrowed against as needed.
- Interest rates with a HELOC are variable and fluctuate with prime rate.
- There may also be administrative costs for appraisal fees, title search and legal fees
Frequent Reasons Why Homeowners May Want to Refinance
- Planning a home renovation
- The need for funds to pay for education
- Start up of a new business and needing capital to proceed
- Using the funds to consolidate all debts into one at a much lower interest rate than most debts are at
- To lower monthly mortgage payments if there is a lower interest rate that makes sense
Mortgage renewal comes up at the end of a mortgage term. Lenders generally will send out a mortgage renewal contract to their clients asking them to sign up for another term with them. There are many people that do not realize that once that term is up, they are not obligated to continue with that lender. It may be the right choice depending on what the current lender offers or it may be in the clients’ best interest to enlist the expertise of a mortgage broker, to research all available options. It is best to connect with a mortgage agent at least 60 days before the renewal date but lesser time can still allow for a successful transaction to be completed.
There is also the option of completely paying out the full mortgage amount at the renewal date. With the mortgage at the end of its term there would be no payout penalty for payment in full.
If the best option moving forward is to move to a new lender it will be treated as a new mortgage and the client goes through the application process specific to the chosen lender.