Mortgage refinancing makes it possible to combine several loans at a more advantageous rate in a single loan. In other words, it is a renegotiation of several credits in a single monthly payment via the mortgage of an already existing property.
Mortgage refinancing has several advantages such as reducing the monthly maturity of your loans through your mortgage, obtaining additional loans with attractive conditions (for renovations, purchases of consumer goods, etc.), while remaining the owner.
Mortgage refinancing is advantageous especially when the loan rates fall, it is important to take into account the costs surrounding mortgage refinancing to choose the most advantageous option. Here are our tips and tricks to avoid common pitfalls.
- Why refinance your mortgage?
In a context where interest rates are low and the value of the real estate is increasing, increase the mortgage on your house to pay off certain debts with excessively high-interest rates (such as credit cards, loans to consumption, etc.). Alternatively, you can easily undertake renovations in the house, or even invest in certain investments.
Overall, mortgage refinancing provides access to liquidity that would not otherwise be available at such a favorable rate. Possible uses of mortgage refinancing:
For someone who does not have enough funds to contribute to their 401(K) and/or who has unused contributions, mortgage refinancing is a very attractive solution. The interest on the mortgage is not tax-deductible when the money is placed in a 401(K), however, the 401(K) remains tax-sheltered and provides a significant tax deduction.
Reinvesting in real estate (rental housing) by refinancing the mortgage of your residence also brings advantages. Part of the amount can be refinanced by the mortgage of your house, which allows you to obtain the funds necessary to obtain a loan, this allows you to deduct the interest on the purchase of rental property and therefore to reduce the overall cost of the loan.
Renovations and reimbursement of personal debts. Mortgage refinancing can also be used for its purposes. In the case of renovations, this is an attractive option to refinance your mortgage to have access to cash and finance the work with, of course, a lower rate than a current consumer loan.
Regarding the repayment of personal debts, if mortgage refinancing is possible, this is not recommended, it is more consumption habits that should be changed, as this should not encourage spending more.
Other investments: refinancing your mortgage loan to reinvest in various investments makes interest deductible from tax. Investments are risky, however, but generally, pay off more than the original investment. It is a risk to take and it depends on your investor profile.
- Beware of the costs of mortgage refinancing!
If mortgage refinancing seems very advantageous at first glance, it is important to know the costs surrounding refinancing and properly assess its repayment capacity. Here are some tips to consider before embarking on a mortgage refinance:
Notary fees: Mortgage deeds are to be stamped by a notary, and therefore, you will have to pay notary fees as well.
Appraisal fees and/or penalties: Be careful if the loan has not expired, there may be penalties. Early renewal is sometimes not possible.
Miscellaneous fees: In the case of mortgage refinancing, there may be various fees that it is important to know, such as commissions for example, or the hands-on fees, which represent 0.75% of the starting amount, fees for the mortgage registrar, approximately 0.10% of the value of the property, etc.
In conclusion, if mortgage refinancing is advantageous from different points of view, it is important to carefully assess your debt capacity and the most favorable reinvestment situations for your situation. It is recommended to simulate the savings that you can generate thanks to a better rate mortgage refinancing. This will allow you to assess, depending on your situation, the possibilities of reinvestment to cleverly optimize your mortgage refinancing while taking into account the costs associated with this type of financial manipulation.