What is refinancing and how it will change your credit?
The need to refinance your mortgage can be for many reasons. Whichever the reason you are refinancing, there are a few things to consider. One of the top questions we are asked as a Mortgage Broker is “will refinancing hurt my credit?” The answer to this question brings cause for a closer look at the refinancing process in itself.
First, you need to know that when you refinance there will be consequences outside of affecting your credit. To refinance you are essentially restructuring terms of a contract and therefore a penalty will apply.
Every lender is different in how they calculate penalties, but in general:
• Breaking a fixed mortgage will result in you paying the interest associated determined by the current interest rate for the remainder of your term or three months’ interest. Whichever of the two are greater.
• Breaking a variable mortgage will result in you paying out three months’ interest.
There are also limitations on the amount you can borrow with refinancing against your mortgage or tapping into your home equity line of credit.
• For borrowing or securing a line of credit against your property you will borrow up to 80% of the appraised value of your home, less the mortgage you have.
• For a Home Equity Line of Credit, you can take out a line of credit up to 65 per cent of the value your home, with the total Home Equity Line of Credit and mortgage totaling 80 per cent.
Now that we have covered the penalty and borrowing limitations, we can tackle the true question—will refinancing change my credit?
The answer to that is yes. No matter how you look at it, debt is still debt. Whether you are looking to refinance to gain access to your home’s equity, gain a better rate, or utilize your home’s equity for investment purposes you are still borrowing money thus your credit is going to change.
Let’s take a look at 3 examples to put this into better perspective.
No matter what your reason for refinancing, remember that debt is still debt and you credit may be impacted.
We advise that before you refinance consider the reasons you are doing so. Ensure they are justified. For example, if you are refinancing to do a much needed home renovation, purchase an investment property or pay for your child’s university tuition then those are all wonderful reasons for refinancing. On the flip side, refinancing to take a family vacation—maybe not a good reason. Look at what your reasons are and then decide if this option is the right one for you.
As always, Dominion Lending Centres is here to help! Give us a call and we can help you navigate your refinancing.