As a homeowner, refinancing your mortgage allows you to capitalize on lower interest rates, access your home’s equity, consolidate debt or even reduce your monthly payments. 


In simple terms, a mortgage refinance involves breaking your current loan agreement and replacing it with a new one, either with the same or a different lender. 


This opportunity can make good sense and result in significant savings in the long run, but it’s important to keep in mind that breaking your mortgage comes at a price. In most cases, your lender will charge you a prepayment penalty to offset their financial loss of interest income. In other words, paying off your mortgage early means you’re reducing the amount of money your lender makes and they’ll want to be compensated. It’s important, therefore, to determine whether the better rate and conditions that you may be able to negotiate are worthwhile. 


How to refinance your mortgage

For most people, securing a mortgage is the largest and most overwhelming financial commitment they’ll make in their lifetime. And although refinancing that mortgage is not quite as onerous, it still requires careful consideration and diligent decision making. Following a few simple steps can help facilitate the process.  

  • Identify your goals

Start by evaluating your objectives. Perhaps you’re hoping to take advantage of lower interest rates to save money or looking to pay for renovations, finance a large purchase, consolidate high-interest debt or send your kids to school by using your home equity. Whatever the reason, make sure your goals are clearly defined. 

  • Weigh the pros and cons 

Mortgage refinancing is a comprehensive financial obligation so it’s important to look at advantages vs risks. While the appeal of accessing equity and lowering your monthly payments is understandable, evaluate the potential drawbacks. For example, if you’re refinancing into a longer term, you’ll be paying more over the life of the mortgage, which also means more overall interest. And if you’re refinancing into a shorter term, you’ll experience higher monthly payments. The right decision comes down to what’s best for your personal situation, so be sure to look at both sides of the coin. 

  • Determine the amount of equity in your home

Over the years, as your mortgage goes down, your home equity goes up. The amount of that equity can easily be calculated by subtracting your mortgage balance from the home’s total market value. Don’t forget to deduct any other loans you have secured against the home. A refinance will allow you to borrow up to 80% of market value. Speak with a Realtor or use an online home estimate tool to assess what your home is worth. 

  • Calculate the costs

In order to make the refinance worthwhile financially, you’ll want to compare the cost of your current mortgage versus the cost of your potential new mortgage. Start with the new rate you’re hoping to secure and, with the help of an online mortgage calculator, determine your new payments. Don’t forget to factor in the prepayment penalty if you have to break your current mortgage. You’ll also need to account for other charges including an appraisal and title search, legal fees and other administrative costs, so make sure you’re prepared. Your mortgage agent will help determine whether refinancing makes sense for you.

  • Maintain solid financial credentials

Similar to the original mortgage application process, your lender will need to properly assess your ability to qualify for the new mortgage. You’re essentially starting from scratch so you’ll have to go through the entire application and qualification process again. Also important to keep in mind are tighter mortgage lending standards and borrowing guidelines, which have made the qualification process even more rigorous as of June 1st, 2021. Your credit score, income, career history and debt level relative to income will all be re-evaluated to determine whether you qualify and, if so, for how much. 

  • Assemble required documentation 

There are numerous documents you’ll be required to submit, which you probably remember from the original mortgage application process. Make sure you know what paperwork is required (your mortgage agent can help) and have it ready. Financing approval is subject to verification of all information provided and any missing pieces can delay your approval or jeopardize the final close. Be prepared to produce everything from proof of identity, employment and income verification, mortgage insurance information, up-to-date property taxes, evidence of home insurance and more. 

  • Close on your loan

Once an appraisal is complete, you’ve submitted your loan application and your credentials have been approved, your lender can move forward with the new loan. Together, you’ll select an official closing date. This is when your current mortgage contract is broken, the loan is paid off in full and you assume the new, refinanced loan. 


Have questions about refinancing your mortgage? Answers are a call or email away!