Refinancing Your Condo, What Should You Do?

A remortgage is a process where a borrower replaces their current mortgage with a new mortgage provided by a different lender. Often times the terms "remortgage" and "refinance" are used interchangeably. While they are very similar, a remortgage and refinance have one big difference. A refinance refers to a new mortgage loan provided by the current lender, while a remortgage refers to getting a new loan from a new lender. There are many advantages to getting a remortgage including lowered interest payments, receiving cash out proceeds, and saving money on closing costs.

The first reason why many people like to remortgage is to lower their housing payments. If an individual has a $300,000 mortgage with a 6% interest rate, they could save $250 per month in interest expenses if they remortgage into a 5% interest mortgage. Assuming the same monthly payment is made, the borrower could pay off their mortgage 6 years earlier with the 5% interest rate mortgage as opposed to the 6% interest mortgage.

Another reason a borrower may choose to remortgage is so they can liquidate the equity in their homes through cash out proceeds. To receive cash out proceeds via a remortgage, most lenders will require an appraisal and for the borrower to have at least 20% equity in the home. If the appraisal proves the borrower has more than 20% equity in their home, the borrower will be able to cash out their equity, about 20%.

Using the same example from above, if a borrower has a $300,000 mortgage and their home is appraised for $400,000, they may receive cash out proceeds of $20,000 (the borrower must keep 20% equity, or in this case $80,000). The borrower is then free to use the $20,000 cash out proceeds as they wish, although their mortgage balance will be increased to $320,000.

The reason many people choose to remortgage as opposed to refinancing with their current lender is to save on closing costs. Compared to the existing lender, the new lender is much more willing to discount closing costs because they have far more to gain from the refinance than an existing lender. A new lender will make money off your interest payments each month, while the current lender has nothing to gain from a refinance except for fees that they will earn. Since closing costs can be thousands of dollars, this can lead to huge savings.