Should you refinance early in order to benefit from low rates?
Are you considering refinancing your mortgage? Early refinancing has become a bit of a trend; not surprisingly though, everybody is aiming to save money where they can. Securing a new loan with far better interest rates for your home might mean saving money on monthly low mortgage rate payments, or utilizing the extra money on other ventures like remodeling or making investments.
Does Everyone Profit from Refinancing?
The decision to break an existing mortgage should not be taken lightly. Despite what the advantages appear to be on the surface, there are penalties associated with refinancing; penalties that could potentially leave less change in your pocket than you had anticipated.
34% of those who recently renewed or renegotiated their best Canadian mortgage rate did so prior to their term expiring. The average time to pay off a mortgage is 7.4 years less than the original amortization. (Source: CAAMP).
Do Your Research and Speak with a Low Mortgage Rate Specialist
If now is not the time to refinance, bear in mind that mortgage brokers can review your best mortgage rate at any time, so it is always possible to do something about your mortgage when you are prepared. Request your broker to conduct a mortgage analysis to find out if renewing your loan at a lower rate is worth it.
Determine What Your Penalties Are
Until recently, the main penalty you would likely ever need to pay was 3 month’s interest. If you have a fixed rate, financial institutions now also take a look at the Interest Rate Differential (IRD) and will charge the greater of the two.
Find out If It’s Worth It
Penalties can surely get expensive, however that does not suggest it is not worth exploring. In order to keep your company, financial institutions can take 15 % off the balance of your mortgage to calculate the penalty, as opposed to using the full amount, leading to a lower overall penalty fee.
In many cases, banks will provide a blended rate for the remainder of your mortgage period. Your penalty will depend on your lender and how well you can negotiate.
It merges your present mortgage at its existing rate with any additional money you borrow at the current rates. Doing this enables you to benefit from existing lower rates without needing to pay a penalty. Nevertheless, some banks could use the posted rate, as opposed to the lower rates to determine your new blended rate.
What You Will Need to Qualify
In order to qualify for refinancing you will need to have at least 10 % equity in your house. Both you and your mortgage advisor are able to find out if long term savings outweigh the penalty.
Is this coverage right for you?
Another thing to take into consideration during your low mortgage rate shopping process is Mortgage Life Insurance, which is different than Mortgage Default Insurance.
What is Mortgage Insurance?
Mortgage Insurance is also referred to as mortgage life insurance and creditor insurance. In Canada, banks use post-claims underwriting for Mortgage Insurance. They only confirm that you qualify after you submit a claim.
Here are a couple of reasons why you ought to take a look at options aside from Mortgage Insurance:
- Coverage decreases with time.
- While your premiums remain the same throughout of your mortgage, the coverage you’re receiving is in fact decreasing with your Canadian mortgage rate balance.
- Coverage is not eternal.
- Your mortgage insurance will simply last as long as the “term” of your mortgage.
- The lender is the beneficiary.
- Assuming that your claim has been approved, the lender is the recipient and the money goes straight into their pockets.
What’s the Alternative?
Another choice is to purchase Term Life Insurance. With Term Life Insurance your coverage does not decrease with time, you’re approved in advance, and the money goes straight to you.
Term Life Insurance
The most common types of term life insurance for mortgage protection are 10-year, 20-year, and 30-year terms. These products charge consistent premiums for that time period. No medical examinations in the middle, no re-qualifying, and no surge in premiums.
Life Insurance Benefits
Individual term life insurance products are not tied to your mortgage.
Name Your Own Beneficiary
Plus, the majority of term life insurance policies in Canada have what’s referred to as a conversion privilege. This enables you to trade in your term life insurance policy for a permanent life insurance policy– without a medical examination.
Other advantages of life insurance consist of:
- Discounts are offered based on your health and your family history.
- Premiums are taxed at a much lower rate.
- Versatile– you can switch mortgage lenders and take the coverage with you if you move or you can convert a term policy into a permanent policy.
- Policy terms do not alter and in most cases the policy premiums are guaranteed.
- If you’re shopping for mortgage insurance, you ought to consider life insurance as an alternative option.
Compare life insurance rates to the mortgage insurance rates provided by your bank.
Top It Up
Think about purchasing or topping up an individual life insurance policy to cover your best mortgage rate instead of utilizing mortgage insurance.
Speak with an Expert
Speak with a licensed insurance broker, not just your mortgage broker, to get insight on coverage.
Are you ready to take the leap into homeownership?
Weighing out the pros, cons, costs, and considerations is the best way to help you determine if you are ready to own a home.
Renting is a wonderful first step to living on your own. Given that it lacks long term commitment many rental agreements generally only last one year. Renting is an affordable and accommodating option for most people.
You’re essentially paying off someone else’s Canadian mortgage rate, as opposed to investing in your future. In addition to this, your rental agreement will have its own set of rules that you will be required to follow during your tenancy.
The current best mortgage rates enable you to borrow money cheaply right away. Furthermore, owning a home will help to provide you with a sense of security and comfort. You have freedom to update it as you please and improve on your investment.
You will need to be personally and financially prepared for homeownership. Expect your stress levels to increase given your monthly budget.
Renting provides low initial costs. Your costs are a predictable expense and thus easy to budget around.
Saving up for a down payment requires substantially more money. Also, there are hidden expenses that turn up unexpectedly.
Finally, if you secure a low mortgage rate today, you will need to keep in mind that your payments may go up when it comes time to refinance.
Renting can be considered an investment if the money that you’re saving is going towards a future down payment. Buying a home can be considered a good investment only if the property value increases. It could also provide a possible source of income if you choose to rent out a room or convert the basement into an income suite.
Buying a home is a big investment. Make sure you’re ready to make the commitment. Contact a mortgage broker to learn more about the pros and cons of homeownership.
Do I really need mortgage insurance?
A down payment serve as a form of security– so the larger your down payment, the better. If you have a greater amount of equity built up in your home, unforeseen circumstances may be more easily managed, and you’ll be less likely to default on your mortgage.
Lenders commonly group low mortgage rate shoppers that have a deposit between 5– 20 percent of the home purchase price into the “slightly higher risk” category. In order for the lender to protect against this increased risk, mortgage default insurance is required.
Best mortgage rate shoppers used to be able to secure 100 percent financing in Canada until October 2008 when the government stopped insuring zero down payment mortgages in an attempt to prevent a U.S. style housing crisis.
What is Mortgage Default Insurance?
Default Insurance, also referred to as mortgage loan insurance, offers protection to the mortgage lender. The lender generally requests this form of insurance for mortgage loans with a down payment of less than 20 %.
As of July 9, 2012, any Canadian mortgage rate requiring default insurance is capped at an amortization period of 25 years. This means 30-year mortgages are only a possibility for those placing more than 20 percent down known as a conventional mortgage.
In the event that you default on your mortgage, the lender will go through the process of collecting the outstanding amount on the loan. If the outstanding loan is still not completely paid off after selling the home, then the insurer will likely provide the difference back to the lender.
Where do I get Mortgage Default Insurance?
This type of insurance is supplied by the government organization Canadian Mortgage and Housing Corporation (CMHC), along with private insurers.
What Will it Cost Me?
When the lender insures the loan, they transfer the insurance premium to the homeowner. The premium is a percentage of the mortgage value based on your Loan-to-Value ratio (LTV). This premium may be paid in a single lump sum or it can be included in your monthly mortgage payments. To calculate your Loan-to-Value ratio, take the mortgage amount and divide it by the property value.
Advantages of Having Default Insurance
It is a win-win situation for both the lender and potential homeowner as the insurance protects the lender and the borrower. The lender is able to provide the same great mortgage products and rates to borrowers that are at a slightly higher risk of default.
Disadvantages of Having Default Insurance
Default Insurance helps make it possible for a homeowner to buy a property with a lower down payment– this indicates they have little value in their home and they will end up paying even more interest on the home loan. If the homeowner would like protection they will need to purchase additional mortgage insurance.