The end of your mortgage term is approaching and you have
received a renewal letter. This is a good time to review your financial
situation to determine whether you should renew or refinance.
Take a look at your financial situation. How are your doing financially? Let's look at some factors to help you:
Credit Score
A credit score is very important for your mortgage
renewal. The credit score is used by
lenders to assess your creditworthiness.
Based on your credit score, the interest rate is determined that you
qualify for. If your credit score has
improved since you last obtained a mortgage loan, you may qualify for a better
(lower) interest rate. However, if your
credit score has decreased, the lender may consider you a higher risk and offer
you a higher interest rate. This will make your monthly mortgage payments more
expensive resulting in financial stress.
A good credit score would be at least 700 or higher. You can improve your credit score by paying
your bills on time, lowering your credit card balances, and reducing debt in
general. Avoid getting any new credit. With these actions, you can increase
your chances of getting approved for a mortgage loan with a lower interest rate.
Interest Rate
With this economic state in 2023, fixed interest rates are lower
than variable interest rates. Those homeowners who had a low interest rate for
a 5 year term will now face higher interest rates. They will most likely choose
a fixed rate for a 2 or 3 year term hoping that the interest rate will drop
over the next few years. This is the strategy many homeowners are using as a
safer option with a short term fixed rate.
Cashflow
Look at your highest interest rate debt. It may be
difficult to continue paying monthly payments on your credit cards with an
interest rate anywhere from 16% to 20% or higher. Consolidating the debt into your mortgage loan will improve your cashflow and maintain a good credit score. One loan with a lower interest rate, and
manageable monthly payments.
Amortization
In terms of your mortgage, this means spreading the
mortgage payments over a period of time. Initially, the typical mortgage
amortization is either 25 or 30 years. Many
homeowners were choosing a 30 year amortization period to lower their monthly
payments. It is time to consider what is
your goal. After your 5 year term has
ended, your principal mortgage loan amount has been reduced, although not by
much. Do you want to continue paying
your mortgage loan faster or do you want to keep your monthly payments lower?
After five years, your amortization will have reduced by a few years depending
on your mortgage payment schedule. The lower your amortization, the faster you will pay down
your mortgage loan saving thousands of dollars of interest. However, if your financial situation is
strained right now, you may want to continue with the lowest mortgage payments possible.
Refinance
What is a refinance?
It is the act of paying out your current mortgage and replacing it with
a new one, which will have a different term, interest rate, and amortization.
There are reasons why homeowners
might refinance:
- To lower monthly mortgage payments: A
borrower may be able to lower their monthly payments by either securing a
lower mortgage rate or by extending their loan term, which would spread
their payments out over a longer time period. This can be important for those
with a tight monthly budget and who are looking for additional financial
breathing room.
- To consolidate debt: Those with
higher interest rate debt can use a refinance to incorporate that debt into their
mortgage loan at a much lower interest rate. This makes financial sense for anyone with
sizable credit card debt, where interest rates often run up to 20% or
more.
- To finance home improvements: Canada is
in the midst of a home renovation boom as thousands of employees now
working from home are seeking ways to make their living spaces more
conducive to work. Refinancing can be an advantageous way to access funds
for those improvements at a rate much lower interest rate than a credit
card or personal line of credit.
When you refinance, you can
choose a new loan term best suited to your financial situation. A shorter loan
term increases your monthly payment, but you will pay off your mortgage loan
faster and save on interest. A longer loan term means lower monthly payments,
but you will pay more interest over time.
The decision to refinance will
depend on your financial goals and your unique circumstances. Talk to a mortgage professional who offers unbiased advice.