One of the best things about refinancing is that, if done correctly, there is the potential to save a lot of money.
As a homeowner, it’s always a good idea to understand all the ins and outs of mortgages, including how to refinance both a first and second mortgage. One of the best things about refinancing is that, if done correctly, there is the potential to save a lot of money. There are countless reasons why you might want to refinance your second mortgage, including but not limited to lowering your monthly payments or lowering your interest rate.
Also, if your financial situation has changed recently, refinancing your second mortgage can help you renegotiate the term of your loan. In certain cases, you may also be able to consolidate your first and second mortgages into one loan. If you have a mortgage or two, you should always keep refinancing as an option, it’s a great way to move your finances, get some much-needed money, or lower your loan payments.
The best time to refinance your second mortgages
Your credit score is better: If you’ve been able to significantly increase your credit score since getting a second mortgage, you might qualify for a lower rate if you refinance.
Interest rates have dropped – If interest rates have dropped since you first took out a mortgage, then refinancing makes sense. You’ll be able to get a lower rate which, in turn, means you won’t pay as much interest and ultimately save money.
Change the terms of the loan: When you refinance, you will be able to renegotiate the terms of the loan. You could potentially increase or decrease your terms to better suit your needs. For example, if you have a 25-year second mortgage, you may be able to reduce it to 10 or 15 years. Not only will you pay off your loan faster, but you’ll also get a lower rate.
Switch to a fixed rate: If you’re currently working with a variable rate, but would like to switch to a fixed rate due to rising interest rates or a financial change, refinancing may be a solution.
You need more money: If the amount of equity in your home has increased and you need additional funds, refinancing your second mortgage can help you gain access to that. With additional funds, you may be able to consolidate debt, especially high-interest debt, into more manageable payments.
Types of second mortgages
Second mortgages involve borrowing against the equity in your home. The two most popular ways to do this are through a home equity line of credit (HELOC) or a home equity loan.
A HELOC is a line of credit that allows you to borrow against the equity in your home. Just like with a credit card, you can withdraw up to a certain credit limit over a certain period (usually up to 10 years). During that period, you will be required to pay at least the interest amount each month; however, once the withdrawal period ends, you will have to make payments for your interest and principal. Also, you will not be able to borrow more money once the withdrawal period ends.
Home Equity Loan
A home equity loan is another way to borrow money with home equity. As with a normal loan, you will receive a lump sum of money that you must repay in installments plus interest. Fees are usually fixed and terms are often longer than a HELOC, which can make it more affordable.
How to refinance a second mortgage
If you decide to refinance your home, consider taking these steps to make sure refinancing makes sense for your situation.
- Understanding refinancing costs
- Find out if you qualify for refinancing
- Find your refinance lender
- Organize your paperwork
- review and sign
Understand refinancing costs
Before making any decision, you should find out if refinancing is really in your best financial interest. Will you benefit financially from refinancing your second mortgage?
Refinancing typically involves a series of fees and closing costs. In general, it can cost between 3% and 6% of your loan. As such, it’s important to calculate your cost and see if your savings outweighs the costs.
Also, you should take a look at your financial situation now and then figure out what it would be like if you had to refinance your second mortgage. Will you still have enough cash on hand to pay your bills and other everyday expenses? Will your savings be affected? Refinancing a second mortgage will take a bit of work, so it’s important to make sure it’s advantageous for you and your financial situation.
Find out if you qualify for refinancing
This step goes hand in hand with step one, make sure you are in good financial standing. This means you’ll need to get a copy of your credit report and possibly even pay for your credit score. If your credit report isn’t favorable, you might consider working on it for a while before deciding to refinance your mortgage.
The main reason we suggest you do this is that lenders tend to base interest rates on your creditworthiness.
In general, lenders will evaluate three main factors to see if you are eligible for refinancing:
- LTV Ratio: Lenders will use your equity to calculate your LTV (loan-to-value) ratio. Lenders typically require that your LTV ratio by 80% or less. However, some lenders are willing to lend even if you have 90% or more. Your LTV ratio is calculated by dividing the amount you owe on your mortgage by the current value of your home.
- Credit Score – As mentioned above, lenders will require a credit check to determine if you are creditworthy. The higher your score, the more likely you are to qualify for a lower interest rate, which is one of the main reasons Canadians refinance.
- Debt: Lenders often check your debt-to-income ratio or your debt-service ratio. These ratios are standard formulas lenders use to determine if you can handle more debt. If your ratio is too high, you will likely be turned down or qualify for a higher rate. In general, lenders look for a debt service ratio of 32% for your mortgage and mortgage-related debt and no more than 40% for your total debt.
Find your refinance lender
It’s always a good idea to ask your lender if they’re willing to refinance your second mortgage at a lower interest rate. If they are willing, you may be able to avoid some fees. However, if your lender isn’t willing to refinance your second mortgage, you’ll need to find another lender who is. Be sure to compare different lenders and get quotes before making your final decision. Remember that your number one goal is to make refinancing financially beneficial.
Organize your paperwork
Once you’ve chosen which lender is the best fit for your refinancing needs, you need to organize all of the potential documents you’ll need to apply. In general, you’ll need documents that allow your lender to assess your debt, assets, income, and equity. This may include your bank statements, tax returns, pay stubs, and more. Organizing your paperwork will help make the application process go more smoothly.
review and sign
Once you’ve applied and been approved, you’ll need to read the contract and make sure you understand all of the terms and conditions before you sign anything. Depending on the type of lender you have chosen, you will either meet with a representative at their office to review and sign the documents or they will be sent to your home. Whatever situation you find yourself in, don’t sign the contract without first reading it. If you don’t understand something, ask for clarification and if you have any questions, be sure to ask them.
Documents needed to refinance a second mortgage
Depending on the lender you choose to refinance your second mortgage, you’ll need to meet several requirements and provide certain documents for verification. In general, lenders will typically request:
- Personal Identification – Government-issued photo IDs to verify your identity.
- Income Verification – Documents such as your pay stub or tax return will be required to verify your employment and income details.
- Debt – You must also provide your bank statements so they can calculate your debt-to-income ratio.
- Asset – You will also need to provide details about the property or collateral you are using.
- Mortgage Details – Lenders will also require documents showing the remaining balance on your mortgage.
- Other Documents – You may also need to provide property tax payments and home insurance documents.
To successfully refinance your second mortgage, here are the main points to remember:
- Make sure refinancing is financially beneficial for you
- Make sure your current financial situation is in a good place
- Always check with the lender that has your second mortgage first.
- Always try to refinance at a lower interest rate
- Check all paperwork and documents
If you follow these steps and choose Loans Canada you should have no problem refinancing your second mortgage and getting all the benefits you expected.