Common Mistakes People Make When Refinancing Their Mortgage
If you’re planning to purchase a vacation property, pay for children’s education, or require cash to cover a sudden expense, then pulling equity from your home through refinancing can be a good option.
However, it’s essential to follow professional advice and read the small print before putting pen to paper when refinancing your property. Even a slight error of judgment can have substantial long-term ramifications on your financial status.
So to help you avoid some basic errors that could prove to be costly, we have put together a list of the most common mistakes people make when refinancing their mortgage.
1. Not thinking ahead
When you need to make changes to your mortgage via refinancing, whether it be pulling equity out or extending the amortization, you should try to align this goal with the maturity date or when the mortgage is up for renewal.
This is typically the only time you can exit with the mortgage without incurring a significant penalty.
For example, if you have a five-year fixed rate, this penalty could be large enough that it could prevent you from making the change altogether. So if you know that you’re going to make changes like increasing your mortgage or making your payments more affordable, try to plan in advance, so you avoid any unnecessary fees.
2. Assuming all banks offer the same products
Let’s assume you’re ready to pull the trigger on purchasing an investment or rental property. It’s a huge milestone to accomplish, but it’s also a risky one.
For reasons we won’t dive into now, we determine a variable interest rate as the best option to increase cash flow, mitigate penalty risk and maximize your bottom line.
However, suppose you’re concerned about the possibility of the amount payment moving up with a variable rate. To address this concern but still keep the benefits mentioned above, we would want to consider renewing your mortgage with a bank who provides FIXED payment options with a variable interest rate. In that case, you must realize that some banks offer FIXED payments with their variable interest rate.
Many people aren’t aware this is even an option they have so therefore will not do this and are inclined to take a fixed rate from the bank to address the concern of affordability which removes other benefits like flexibility, penalty risk, and minimizing overall interest cost.
This is just one example of a situation where making the assumption that all banks offer the same types of mortgage, can lead you into taking an inferior mortgage product not best suited for your situation.
Also, when it comes to mortgage products, you will be surprised by the vast array of different financial products out there that can help you accomplish your goal.
Many of these products may be better than what your current home bank is currently offering. Therefore, to ensure you receive all the options available to you make sure to speak to an independent mortgage broker who has an understanding of the different options out there, or give us a call and we’ll be happy to provide some suggestions.
3. Thinking about the interest rate first
Too often, when going down the refinancing route, homeowners start by trying to find the lowest interest rate possible.
However, it’s often like putting the cart before the horse and prevents more specific solutions based questions like “How can I make my payment MOST affordable?” or “How can I avoid penalties now and in the future?”.
For example, you will typically receive a lower interest rate for a twenty-five-year mortgage (amortization) than a thirty-year mortgage.
However, if your goal is to make your monthly payment as affordable as possible, a thirty-year amortization is where you will want to narrow down your search. There’s even a small group of banks who can offer you a thirty-five or a forty-year amortization to make your payment even lower.
So yes, the interest rate is essential, but it should come second to the solution you’re trying to put in place for yourself and your family.
In summary, think about what you’re trying to accomplish by refinancing first, then focus on finding the best interest rate within that specific pool of financial products that provide the best solution to what you wish to accomplish.
To avoid these and other refinancing mistakes, reach out to me. We customize our solutions to suit our client’s unique situations as we have access to a vast network of major banks, credit unions, trust companies, and alternative lending options.
Our services include first-time homebuyer mortgages, renewals, refinancing, debt consolidation, investment properties, and private lending. We also offer reverse mortgages, second mortgages, self-employed mortgages, and CHIP reverse mortgages for clients.
We serve clients across Comox, Vancouver, Campbell River, Victoria, Mill Bay, Cobble Hill, Duncan, Nanaimo, Saanich, Langford, and Sidney, British Columbia.