Refinancing a mortgage is a process whereby you replace your existing mortgage with a new mortgage under different terms such as, lower interest rate, different amortization period, new lender, shorter/longer term of the mortgage. There are many different reasons why a homeowner could decide to refinance their property. There is a common misconception that refinancing a mortgage is simpler than applying for a new mortgage when purchasing a property. However, there are several hurdles that the property owner has to overcome before a successful refinance. First and foremost is making an informed decision to refinance.
In this article we will discuss the basic process of refinance taking into account different type of properties. We will discuss in detail the fees and costs associated with a refinance transaction from a legal point of view as well as the fees that you could incur as a result of refinancing your mortgage.
Is Refinancing Your Mortgage Right for You?
There are many reasons why a home owner would decide to refinance their existing mortgage. Most common reason is debt consolidation. Home owner who has equity in their house, could request from the bank a higher mortgage amount and use the difference between their current mortgage amount and the new mortgage amount to pay out their consumer debt. Therefore, including their debt into their mortgage under a smaller interest rate. However, there are some hidden and not so hidden costs that the home owner should be aware of.
Another reason why some homeowners choose to refinance the property is to conduct renovations or remodel their current home. By taking out a new mortgage and investing back into the property, the homeowners are hoping to increase the value of their home. Taking out equity and using it for renovation could also be beneficial if the homeowner decides to sell their property in the near future. However, the homeowner has to keep in mind the costs associated with breaking the mortgage prior to maturity, perhaps choosing shorter mortgage term if renovations are being done for sale purposes.
Third most common reason for refinancing your property is to withdraw equity and use that equity as a down payment to purchase another property. Equity accumulation could be used as a downpayment towards a secondary property or an investment property. This is a very tough financial decision as one has to take into account that the funds for down payment are borrowed and the home owner is paying for higher mortgage on the current property. Market conditions and the cost of servicing the investment property have to make financial sense before proceeding with this option.
Lastly, for the purpose of this article, a home owner may refinance the property because their current mortgage is up for renewal and has matured. In this instance, the costs are minimal but there are still some instances where a homeowner could incur unexpected costs. If the new mortgage is not ready to be advanced on the maturity date of the current mortgage, the homeowner may need to renew their current mortgage to ensure that they are not in default. If the homeowners are noted in default by their current mortgage, it will reflect poorly on their credit worthiness and the new mortgage may be jeopardized by this. The renewal of the current mortgage should be done as an open mortgage, meaning that it can be paid out at any time without a penalty. Open mortgages tend to have higher interest rates because the bank is uncertain as to the term of the mortgage. Therefore, should the home owner be in this situation, they would be paying higher daily interest on the mortgage until such time that conditions for a new mortgage are met and a new mortgage is ready to be advanced.
Costs associated with a refinance
There are several factors that should be taken into account before making a decision to refinance your property. Cost is a significant part of any real estate transaction, including refinance of your mortgage. Depending on the term of your existing mortgage, most banks will charge a penalty to pay out your current mortgage if you break the term and decide to pay out your current mortgage before its maturity date. The amount of penalty depends on your current mortgage term; whether your current mortgage has a fix rate or a variable rate, and how many months remain until the end of your current mortgage term. If you are thinking of refinancing, the first step should be reaching out to your current mortgage provider to enquire about the penalty that you may incur should you decide to proceed with a refinance. Once you have this information, you can start calculating whether the cost of the penalty out ways the benefit of a new mortgage.
As stated above if you are waiting for maturity of your current mortgage to avoid paying penalties, ensure that the new mortgage conditions are satisfied and the new mortgage will be advanced on the same date as the maturity date of your current mortgage to ensure smooth and financially lucrative transition.
Legal fees also form part of the financial decision whether or not to refinance your current mortgage. Some banks offer in house lawyer to close your deal and it might seem like a great alternative as the fees tend to be on the lower end. However, with a lawyer chosen by the bank, there is a potential conflict of interest. Furthermore, due to lower fees, quality of service and attention to the file is diminished. Lastly, because the lawyer is chosen by the bank, the homeowner has little say as to the closing date of the mortgage. Therefore, the home owner may end up in a situation where they tried to save on legal fees, but may be forced to pay higher interest on their current mortgage because of renewal of current mortgage into an open term or worse pay high penalties because lawyer could not accommodate the sensitive time line.
By choosing your own real estate lawyer, you would be able to enquire about the lawyers’ availability to ensure that the time line that is important to you is adhered to. For a refinance transaction a real estate lawyer would conduct the necessary searches to ensure clear title, prepare legal documents that are required to register the new mortgage on title, order title insurance and pay out your existing mortgage/mortgages.
Aside from legal fees, when renewing the mortgage, it is important to note that if a homeowner is changing a lender/ bank or changing an amount of their mortgage to a higher amount, the homeowner would have to obtain title insurance for the transaction. While this is an optional expense, most banks now require title insurance due to high rates of fraud.
When refinancing a condominium, a new lender may require the homeowner to order a status certificate. While the expense is minimal, the homeowner should be mindful of the timeline it takes for the condominium corporation to provide a status certificate, usually within 10 business days. Status should be ordered ahead of time to ensure that the refinance can close on time.
Aside from legal fees and potential bank penalties, one should be aware that there may be other fees associated with refinancing your mortgage. In most cases, the bank will require an appraisal done on your house. The cost of the appraisal is an additional expense that should be taken into account when calculating the cost of a refinance transaction. It is important to enquire with the bank the cost of the appraisal and when it is payable. In some instances, the bank will deduct the cost of the appraisal from the amount being advanced under the new mortgage.
Should a homeowner now qualify for a mortgage with a bank or an A lender, they may incur additional expenses such as a lender fee and /or broker fees. B lenders are financial institutions that due to their flexible lending criteria may qualify an individual for a mortgage who may not qualify with a bank or an A lender. In most circumstances the lender fee is equivalent to 1% of the mortgage amount. This amount is deducted from the mortgage advance and should be taken into account when determining if refinance is the right step for you. Broker fees are also an additional expense that may be charged by a mortgage broker for assisting a homeowner to prepare and submit mortgage paperwork.
Unexpected costs or deductions
In some circumstances, the bank may require debt reduction prior to approval or from the proceeds of the mortgage. The bank may request that certain debts be paid out from the proceeds of the mortgage such as a student loan, car loan and/or consumer debt such as credit cards and personal lines of credit. This is done for the purpose of reducing homeowners debt ratio.
The bank may request that property taxes be paid up front or hold back certain amount for property taxes to be paid.
Some banks may hold back for interest adjustments purposes where the payment date and closing date are not the same. For example, a bank may require that all payments to be made on the 1st of each and every month, but the mortgage is closing on the 15th of the month. Therefore, the bank will hold back the amount of interest from the 15th until the end of the month and this amount will be deducted from the advance of a new mortgage. Therefore, the next mortgage payment will be the 1st day of the following month.
- Closing Jan 15.
- Interest adjusted from Jan 15-30
- First payment date Mar 1. – this is the payment for interest and principal from Feb 1 to Feb 28th
- Where did my Feb 1 payment go? – interest adjustment took care of that. Interest from Jan 15-30 was calculated and charged upfront rather than being charge on February 1.
This list is not exhaustive but the main expenses that one should enquire about when thinking about refinancing a property.
If you are refinancing your investment property, the cost and fees associated are almost the same as those for a primary residence. The only difference may be that the bank will require a copy of all the rent agreements and confirmation of rent payments.
New mortgage terms
Equally as important before making a decision to refinance is to enquire about current market mortgage terms and what kind of terms would be available to you specifically. Is there interest rate offered lower than your current interest rate? What is the difference in payments between the old and the new mortgage? What is the term of the new mortgage; 3 year, 4 year, 5 year? What prerequisites or condition is the new bank putting forward to be satisfied before you would qualify for the mortgage?
To make an informed decision about a new mortgage, you could work with a mortgage broker or go to the bank directly. There benefits of each are outlined in our previous article.
In conclusion, refinancing the property is not a simple process and the costs associated with the transaction can vary. The most important thing is to understand the cost and the benefits of your refinance and to make an informed decision. Equally as important is working with a knowledgeable lawyer who can adhere to your deadlines which will reduce stress and save you money in the long run.
At MBLAW Professional Corporation, we understand that refinancing your mortgage is a complex decision with significant financial and legal implications. Our experienced real estate team will guide you through every step, ensuring your transaction is handled smoothly, on time, and in your best interest. Ready to explore your refinancing options with professional legal support? Contact us today to book a free consultation.
