“Why would I want to refinance my mortgage today?” Is a question, I was asked by clients on a daily basis, when it came to finding savings and consolidating high interest debt with a new mortgage. As a former mortgage representative for a multi-billion dollar lending institution, I have had my fair share of discussions with clients regarding the benefits and pitfalls of mortgage refinance for their particular circumstances. Given the drop in interest rates, and the various refinancing options available, many folks are looking to save in the long run on the greatest purchase and asset of their lifetime; their principal residence.

Most of the individuals I dealt with, were well to do individuals who had worked hard at securing a mortgage and a home, and were very keen on determining if they could refinance their home in order to take advantage of a lower interest refinance rate, and in many cases consolidate their current debt load by paying off the balances on high interest loans and credit cards. This, in many cases, included the balance on their current mortgage, that would ideally be re-written with their debt into a new mortgage and a better refinanced mortgage rate.

After a few years of working as a mortgage representative, I had a good sense within minutes, based on a few questions in a conversation, the answer as to whether a client would qualify for a refinance on their property. What was more evident to me during those years, over a decade ago, was that there were many factors to consider as to whether or not to refinance a mortgage. And not every refinance mortgage solution was created equally, nor was there a mortgage refinance product which suited every household.

Furthermore, the general public does not have a visible non-bias resource that is readily available to provide information you need when considering a refinance of a mortgage on a home. Consequently, when consumers look to an institution for refinancing needs, most of us blindly accept the terms of the new mortgage, without asking important questions regarding mortgage interest rate and flexibility of payments on the loan amount owing on the newly refinanced mortgage. As a former mortgage representative, I took this information and knowledge on mortgage refinance for granted, until I was on the other side of the desk, across from a lender offering me terms and conditions that I knew were only beneficial to the lending institution’s bottom-line – PROFIT!

Prior to working in the mortgage field, or having any knowledge of mortgage refinance, I would blindly accept the terms and conditions placed before me by my financial institution. The difference between knowing the right questions to ask, and blindly accepting terms put in front of me by the lending institution to sign, on average, for a five year term of the mortgage, may have very well resulted in me paying over $10,000 dollars of interest, money that I could have kept in my pocket, if I were better informed on how the refinance process worked and what questions to ask the lender.

A few short months ago, I attended a local branch of a mortgage lender with a dear family friend, as a supporting voice, given it was her first application for a refinance on her home mortgage. It was at this time, that I noticed the intimidating environment we were in, given, we were sitting in the lender’s building and at the desk of a representative for the lender who had the final word on whether she would receive the money (if any) needed for renovations on her home. As I listened keenly to the mortgage refinance discussion, I was well aware of the associated costs that may be incurred, in the event she considered and acted upon accepting a certain refinance product listed by the representative.

It was at this time, that I quickly jotted down the following questions to ask the representative, questions I felt were essential prior to any discussion of mortgage rates and refinancing rates as applicable in this case:

  1. Why would it make sense to refinance my mortgage today?
  2. What are the prepayment charges I am going to pay when refinancing my mortgage, in order to qualify for a lower mortgage rate?
  3. Would you provide me with a break down of all the charges as applicable in my individual circumstance?

Refinance my mortgage rate – does it make sense?

As the mortgage representative crunched the numbers, we soon came to realize that my friend would have incurred a significant penalty in breaking her mortgage which worked out to about 4% of her mortgage loan amount. The additional fees in her case, that the lender wanted to charge did add up, and upon further discussion, it became apparent that the cost of refinancing outweighed the benefit in her particular circumstance, despite a lower refinance rate.

In our discussions, the one point that I stressed on with my friend was to allow for the lender’s mortgage representative to crunch the numbers and provide her with a printed statement of all charges incurred in the refinance, and a timeline as to when the refinanced mortgage interest rate would start saving her money. This point was critical in our meeting, given, its the lender’s calculations and criteria that will matter in the end, when I consider to refinance my mortgage and determine the penalty and associated costs with this process – not a web based mortgage calculator.  All the mortgage calculators available via third parties, may not take into consideration the terms and conditions applicable in her case regarding the mortgage and the subsequent refinance. So, based on my experience, it does make sense to have the lending institution provide me with the numbers in writing, when considering to refinance my mortgage with the current lender.

After wrapping up our forty five minute meeting, we summarized our discussions on the timeline associated with recouping of all costs associated with the refinance and the amount of savings thereafter on a yearly basis. Given, the interest rate differential between her rate and today’s rate was minimal, the added expense tacked on to the mortgage principal made little sense in this case with my friend’s application.

Key points to consider, if I were to refinance my mortgage

I won’t sign anything that does not make sense to me or that I do not understand! This is a critical point, as accepting the rules of the lending institution to refinance my mortgage could have terms that may make it more expensive in the long run, if I can’t recoup the costs of the new mortgage in a reasonable amount of time, and save money in the long run to offset the associated costs to refinance my mortgage. It would be at this point, where I would ask the lender to provide me with alternative mortgage refinance options that will save me money in the long-term with respect to my own particular refinance.

I would ask the lender’s representative to provide me with a print out of all costs involved in the refinance. Another important point I would keep in mind, is to ensure that I have everything involving the refinance of my mortgage presented to me in writing.  A Verbal commitment in this case is meaningless, as people get shuffled around in these financial institutions and its impossible then to get a new representative to act on someone else’s commitment.

I always negotiate the interest rate. Even if I have to sleep on it for a night, I will make sure that I negotiate my rate when I refinance my mortgage, before I sign anything accepting a new mortgage from the lender. The reason being, that even a fraction differential in the interest rate can save me thousands of dollars in interest within a short few years. For example: Consider a 5 year conventional closed mortgage, in comparison with a refinance option that can be structured at a much lower interest rate as demonstrated below.

Option 1.

A $200,000 mortgage at the posted 5 year rate of 4.74% amortized over a 25 year period results in the following after a completed 5 year term:

Total Principal and Interest Payment for Term:                                           $68,027.40

Total Principal Repayment for Term:                                                           $23,712.55

Total Interest Cost for Term:                                                                        $44,314.85

Balance at End of Term:                                                                            $176,287.45

Option 2.

The same $200,000 mortgage structured as a second mortgage at a rate of prime (assuming =2.85%) + 0.25 % equating to 3.10% amortized over a 25 year period results in the following after a 5 year term:

Total Principal and Interest Payment for Term:                                           $57,406.80

Total Principal Repayment for Term:                                                           $28,721.04

Total Interest Cost for Term:                                                                        $28,685.76

Balance at End of Term:                                                                            $171,278.96

It is clear, that Option 2 provides a beneficial scenario, with a total interest cost in savings being the greatest, than Option 1 over the five year term, with savings totaling over $15,000 dollars! This is money I can use for other bills, family or for savings as opposed to handing it over to a financial institution! In the upcoming sections in this site, I will share my best practices, regarding what I have learnt when considering various mortgage refinance products available in the market, and how I negotiated the interest rate with lenders which helped lower the costs to refinance a mortgage, and also resulted in thousands of dollars in savings with little effort.

If you need assistance in assessing your mortgage refinance or mortgage renewal, call me for a free consultation at the number below, and let’s begin saving!

victor@bestrefinance.ca

telephone: 416-895-6074