Are you coming up to the end of your current mortgage term? This is an opportunity to pay off your mortgage if you have the funds and then be free from the biggest purchase of your life. While this is all our goals, we often owe on our homes and must keep up a payment plan. This gives you two choices: renewal or refinance.

Not sure what is best for you and your wallet? Let’s break down the difference between mortgage renewal and refinance.

Financial Institutions

Lenders are in the business of making money, just like any other company. While this is how they stay afloat, they are also in our communities to help people finance homes so they, too, prosper.

It is a balance they achieve and is kind of a win/win situation. Remember that they want to lend you money as long as you can qualify and will help you set up the best repayment strategy that works for you.

Refinance

Sometimes you want to change your lender or access some of the equity you have built up in your home. You have taken a loan from your lender and are obligated to pay it back in full, so if you want to make changes, there has to be refinancing.

The best time to make this change is at the end of your current term, although you can do it anytime. There will be penalties if you break the term, however. Here are some reasons why you may want to refinance mortgage:

• Home Improvements: You may need some extra money to take on a home improvement project, and your equity is there to help.
• Debt Consolidation: Credit cards and loans can get overwhelming without a way out, so some people consolidate them into a mortgage for one low payment.
• Lower Interest Payment: You can change your monthly payments by extending the mortgage amortization and taking advantage of a lower interest rate.

Renegotiating your loan agreement replaces your old mortgage completely, so there will be a new amortization length and mortgage term. If you can, get a shorter loan that knocks off several years to the mortgage. Starting over will bring your payments down, depending on the loan’s overall length, the current term’s length, and the interest rate you lock in. This will free up money every month to ease any financial burdens.

Conversely, you can be more aggressive in your repayment and get out of debt sooner with your new, refinanced mortgage.

Mortgages

When you get a mortgage, you decide on the length of the loan. There are several amortization periods, and this is in place to extend the entire repayment period so payments are lower. Amortization periods can be between 5 and 30 years and longer and depend on what your finances will allow you to qualify for.

Beyond that is the mortgage term. This is the length of time with which you have an agreed-upon interest rate and payment frequency. Terms are usually six months to five years. After that, you need to start a new financing plan.

Renewal

A renewal is typically done with the same financial institution, and it is an easy process. At the end of your current term with your lender, they will usually contact you to renew the mortgage. Terms and conditions will stay the same unless you want to change them, and you will go with the current rate. Mortgage renewal will happen several times over the life of your loan, and it’s always a good time to review your current financial position and lifestyle.

You can see what the bank offers about interest rates for different terms and decide what works best for you. The best part is there is no cost to renewing your mortgage.

Renewals are like a reset on your mortgage and are the perfect time to assess your mortgage. If you have the ability, you can make a lump sum payment to apply directly to the principal amount owing. This will change the payment amount of the new term.
Adjustments can be made to mortgage payment frequency to help pay the loan off faster. Usually, you don’t have to fill out a new application and prequalify for the loan unless there have been drastic changes to your financial situation.

Deciding which path to take is not easy, and it all depends on your current financial situation, your personal and professional goals and the security of you and your family. Understanding both mortgage renewal and refinancing options will empower you to make the right choice for paying down your home loan. Ultimately, both lead you toward mortgage freedom, so pick the right one that works for you in your current situation.