Refinance a Mortgage with a Low Credit Score
When Canadian homeowners are close to the end of their mortgage term, many of them start considering mortgage refinancing. Also known as remortgaging, it is the act of renegotiating your finances on a mortgage, with the same or a new lender. It may include, and isn’t limited to, changing interest rates or increasing the amount of your outstanding mortgage by utilizing your home equity. Deciding if refinancing is right for you is important for any homeowner to understand.
How does a remortgage work?
Coming to the end of your mortgage is the best time to consider a remortgage because that is also when it is the most inexpensive. No minimum amount of time needs to pass when you want to refinance your mortgage. However, doing it too early could come with unwanted penalties.
In Canada, mortgages are contracts that last a set amount of time. Near the end, or even at the end of the contract, you can renegotiate the mortgage with your lender. Some mortgages have terms as short as five years and as long as 30 years. If you have a contract that lasts 30 years, you may not want to wait until the contract is over to refinance the mortgage. Instead, you could wait 10 years into the term, after you’ve paid a good portion of your mortgage, and take advantage of refinancing opportunities.
Refinancing a mortgage requires a strategic perspective since you’ll have many options. Whether or not to stay with your current lender and what kind of refinance you’d like are part of making the decision. However, equipping yourself with knowledge on how a remortgage works can make the process go smoothly.
Ways to Refinance a Mortgage
Rather than having a set number of steps, remortgaging has different ways to start the process. The three main strategies are breaking the mortgage early, adding a home equity line of credit (HELOC), or blending and extending.
Breaking the Mortgage
This type of refinancing is the most common kind. In most cases, remortgaging will require you to break your mortgage contract with your current lender. You can still initiate new terms with the same lender, but when the market fluctuates and interest rates go up, many choose to collaborate with alternative lenders.
Breaking the mortgage also requires you to be careful in choosing the right time to break it. The bank typically sets penalties, such as paying for three months’ worth of interest. If your new mortgage rate is significantly better than the previous one, you may be able to justify the costs with a complete switch.
Adding a HELOC
With a HELOC, you gain access to your home equity on your own terms. It works similarly to a credit card, in which you have a set limit from which you can continue to withdraw funds. HELOC’s have lower rates than credit cards because they are secured loans, and until the term is over, the only responsibility you have is to pay the interest.
Blending and Extending
The ‘blending’ refers to the blended rate, which is the current mortgage combined with the additional money you borrow at the current market rates. The ‘extending’ is applicable towards the mortgage term so that you have more time to pay. However, blended rates should be carefully compared against other standard mortgage rates because they can have higher interest.
Different Types of Mortgage Refinance
After deciding on what kind of refinancing is best for your situation, you can choose between two types of refinancing, depending on your financial situation. The main two are cash-out and rate-and-term.
This type of refinancing gives you the opportunity to change either or both the term or the mortgage rate. It can also be referred to as “No Cash-Out Refinancing” because there isn’t any money being given out to the borrower.
Rate-and-Term financing is a good choice when you are in an ideal financial position. If you’ve seen your credit score increase and the housing market fluctuate, rate-and-term would be a good option because refinancing could lead to a lower interest rate and lower monthly payments.
Unsecured loans, on the other hand, are a little more challenging to get, but remain available to those who do not have a good credit score. The lack of security may cause the lender to attach high interest rates because of lower credit scores.
This type of refinancing allows homeowners to access their home equity in the form of extra cash. The new mortgage that you receive will be more valuable than the outstanding balance, allowing you to keep the difference. Compared to rate-and-term, cash-out opens more opportunities for borrowers, such as using the money towards a large renovation or an emergency.
On the other hand, cash-out refinancing also has higher interest rates, and there isn’t a set amount of cash that you’ll receive. If the amount of money is from your home equity, the cash will depend on the house’s loan to value ratio. For some lenders, other factors like your credit history may be applicable.
Reasons to Refinance
Refinancing your mortgage also comes with a handful of benefits.
Lower Interest Rates
As previously mentioned, cutting the mortgage early can lead to penalties and/or fees. However, if the penalties and fees and the new interest rate is comparatively lower, refinancing can be worth the switch. In general, refinancing will save you money on a monthly basis, not because the house changed its value, but because interest rate changed, possibly resulting in a lower monthly payment.
Access to Home Equity
Whether a line of credit or a loan, your home equity opens many new opportunities for you. You can start a large renovation or you can refinance your mortgage for a second home. By breaking your mortgage and refinancing, you could access up to 80% of your house’s value through a loan. Home equity loans are similar to low credit loans and allow you to use money that’s your own for sudden large expenses.
Accessing the equity in your home gives you the opportunity to consolidate your debt. This includes debt from vehicles, post-secondary education, or credit card bills. Before you choose to consolidate through refinancing, confirm that you have enough equity in your home.
Effects of Home Remortgaging on Credit Score
For a very brief period, the effects of refinancing may be negative. Initially, the bank will see the added hard credit checks and new debt because refinancing shortens credit history. However, this is only natural for any loan or line of credit process. Because refinancing allows you to save money through lower interest rates and flexible loan terms, the long-term effect of remortgaging is a better credit score. That in turn will allow you to reach the credit score required for a mortgage in Canada, in case you would like to buy a second home.
Alternatives to Refinancing with Alpine Credits
Refinancing your mortgage should be thoroughly considered to make sure the benefits outweigh the costs. At Alpine Credits, our team of financial solutions specialists can discuss your options with you. Contact them today and they can help you navigate through your choice of whether to get a mortgage refinance or a home equity loan.
For many years, Alpine Credits has been assisting tens of thousands of Canadian homeowners just like you with their financial situation by accessing their home equity. Regardless of your credit history, income, or assets, we believe that you should have access to a loan. Whether you need the funds for another property or to start a major renovation, your home equity is available.