With mortgage rates at outrageous lows, it’s easy for homeowners to save money by refinancing. Saving a lot of money takes a bit more effort.
Industry experts say anyone paying more than 3% on a fixed-rate mortgage — or 0.75% more than current rates — should try to strike a better deal. The savings, often hundreds of dollars a month, can help you endure the financial fallout from the COVID-19 pandemic and pad your wallet for the future.
But when dealing with large sums of money, even small decisions can have a huge impact. Here are six tips to maximize your savings when refinancing:
1. Look your best as a borrower
Whether you’re refinancing with a new or existing lender, you need to prove your reliability as a borrower all over again. And Jessi Johnson, a Vancouver-based mortgage broker and realtor, says lenders are being skittish while the COVID-19 economy remains uncertain.
You’ll need a minimum credit score of 600 to qualify for refinancing, Johnson says — 650 if you want the best advertised deal. Check your credit score for free online and take steps to improve it, if you can.
2. Read the fine print
Before you fixate on some crazy-low rate you’ve seen in the news, like HSBC’s 1.99% fixed mortgage, do a quick reality check. Not everyone can get a rate like that — and you might not want to.
Some advertised rates only apply to high-ratio borrowers who are paying extra for mortgage default insurance. Some might require a commitment to a term length that doesn’t work for you.
Plus, no-frills mortgages can come with restrictions. Your new agreement might lack prepayment privileges, portability or be prohibitively expensive to break early.
So don’t assume your new mortgage will work just like your old one. Pay attention to the details while you’re hunting for a low rate and think about what features matter to you.
3. Calculate your closing costs
The whole point of refinancing is to save you money, so make sure you actually come out ahead after covering the cost of the transaction.
First off, there’s a mortgage registration fee of approximately $70 and legal fees that run between $700 to $1,000.
And if you’re switching lenders, expect to be hit with an extra discharge free. Prices range between $0 and $400, depending on your province and lender. Luckily, if your mortgage is big enough, your new lender may consider paying your legal fees for you.
Once you’ve tallied up the one-time cost of switching, use an online mortgage calculator to see whether a lower interest rate will save you more in interest over the course of your term.
4. Get ready to act fast
The COVID-era economy is unstable; as a result, today’s amazing offers may not last for long. The quicker you get all your information in order, the quicker you can lock in your rate.
5. Protect your family from debt
A new mortgage is a good opportunity to remember the risk that thousands of dollars in debt can pose.
While it isn’t pleasant to think about, homeowners need to consider the possibility that something unexpected might happen to them. You want to ensure your family won’t have to panic about mortgage payments in the unlikely event of your death
6. Prepare to break up with your lender
Loyalty is all fine and good, but the statistics say it’s better not to be married to your lender.
Companies know you don’t want to go through the trouble of shopping around — and they’re taking advantage. A Canadian government agency, the Office of the Superintendent of Financial Institutions, reported in January that lenders offer their returning clients rates that are 0.09% higher on average than rates available elsewhere.
Even that difference — applied to a $400,000 mortgage with a 20-year amortization at 2.25% versus 2.34% — would save you $1,651 in interest over five years. But that’s just the average.
“Many clients who are renewing are offered rates much higher than what we can get. Recently, we have been able to beat offers by as much as 0.34%. That is a massive difference,” says Jesse Abrams, co-founder and CEO of online mortgage brokerage Homewise.