5 Key Factors – REFINANCE or NOT to REFINANCE

REFINANCE or NOT to REFINANCE YOUR CURRENT MORTGAGE

 

With Interest Rates at historical lows most likely you are wondering if your mortgage is worth all the costs to renegotiate a lower interest rate.  Questions common to many  are:

1. With record low interest rates, is it a good time for me to refinance?
2. Will the lower interest rate outperform the costs to break my mortgage contract? 
3. How much will it cost in penalties and fees?
4. What other stumbling blocks could there be if I were to refinance? 

Here is some basic information to help you identify when and if refinancing is your best option.  Everyone wants to save money but what are the “hidden” costs of breaking your mortgage contract early and renegotiating at a lower rate?

 

The 5 key factors in understanding review are:

 

1. Loan –to-Value
2. Penalty Payout
3. When will Penalties be waived?
4. Other Costs to Consider
5. What if you have a 40 year Amortizations which are no longer available

 1. Loan-to-Value

The first hurdle is the process is how much is you home’s value?  One way to estimate your homes worth is looking at your most recent BC Assessment and using that value in your calculation.  Remember, 2009 home prices continue to fall consequently your assessment may be overstating the value.  In today’s market the rule of thumb is to use a slightly lower amount than the value stated on the assessment. 

 

Most preferred estimate of value is market value; what a buyer is willing to pay for a home of similar style, size and neighbourhood.  Ask a realtor for recent sales in your area and use that value in your estimate.  Remember it’s not what you think it’s worth or how much you could sell it for but what the market is willing to pay. 

 

Once you have established a value, now look at you mortgage amount including any secured home equity lines of credit.  Add the debt against your house and divide that number by the estimated value.  The result is estimates the Loan-to-Value (LTV).  If the number falls below 80% then move on to the next step in the process. 

 

For percentages above 80% then your mortgage would fall under an insured mortgage category and would be sent for approval to either CMHC or Genworth and additional costs would probably prohibit any savings in refinancing.  Also, lenders may not consider you application with a high ratio.

 

The best scenario for LTV is 70% or lower.  It is more likely that your application will be accepted with a lower LTV. 

 

 

2. Penalty Costs – 3 months interest or IRD?

Most people understand that if you renegotiate your mortgage prior to the term’s end you will pay a penalty.  When the interest rates are higher or similar to your current rate you will likely pay 3 months interest penalty.  But in times of historically low interest rates likely IRD or Interest Rate Differential will be the cost of refinancing.  Whichever is higher the lender will charge and in times of falling interest rates most lenders are charging the IRD.  IRD can be much more expensive than 3 months interest . 

 

ASK for both the 3 month penalty and the IRD penalty and have the lender be specific to  which amount affects your refinance options.  Have the lender put it in writing so you have something reference if the final discharge amount is different.  The further into your term the lower the penalty costs will be.  Example year 2 of a 5 year term will pay more than renegotiating in year 4 of a 5 year term. 

 

3. Window of Opportunity to Waive penalties! 

If you are within 120 days of the mortgage term ending most lenders will allow you to renew without penalty; there could still be fees to switch to another lending institution but likely it will be minimal.

 

4. Other Fees to Consider when Refinancing

Mortgage payout penalties can be the largest fee but consider other costs to refinance.  Legal fees can be anywhere from $440 – 800 or more.  For those who chose to life insure the mortgage consideration must be given to the increase payments because you age may fall under a higher premium.   There could also be an application fee $75 as well as $200 -300 to transfer to another institution.

 

5. What if you have an existing 40 year Amortization?

If you have a 40 year amortization and you are in you are first term your application will not proceed unless you r gross income can qualify at a revised amortization of 35 years or less.  The federal government discontinued the use of 40 year amortizations in October 2008.