How To Refinance Your Mortgage

Author: Chris Allard

Category: Mortgages & Rates, Refinancing

Tips to Help You Refinance Your Mortgage and Save

Each year, many Canadians refinance their mortgages. Whether you want to complete home renovations or save money with lower rates, there are many valid reasons to refinance your home. But how you choose to refinance a mortgage will determine how much you end up saving in the long run.

Working with a mortgage broker can help you find the best route to refinancing. Your mortgage broker will determine what you can afford in terms of home values and mortgage payments associated with different values and rates. By taking into consideration your current financial situation and future goals, your mortgage broker will find options to refinance a mortgage that will help you now and over time.

Here’s a look at mortgage refinancing and tips to find the best solution for you.

Why Refinance?

As mentioned before, there are a number of reasons to refinance your mortgage. Here are a few common—and smart—reasons to refinance a mortgage:

Lower Interest Rates

Low mortgage interest rates are the main reason homeowners choose to refinance. Although you will likely have to pay a penalty for breaking your current contract, refinancing to a lower mortgage rate could save you plenty of money over time. Examples of penalties include:

Three months interest for variable-rate mortgages;
The greater of three months interest or an interest rate differential penalty (IRD).

Lower Monthly Payments

Another part of mortgage refinancing is extending the amortization period in order to reduce your monthly payments. So if you had 15 years left on your mortgage, you could extend this to 25 years and have lower payments as a result. This can be useful for those who are in a tough financial situation—i.e. reduced income due to a separation, job loss, illness, or injury.

Access Home Equity

With a mortgage refinance, you can gain access to a part of your home’s value. This home equity is often used for large investments, such as:

Your kids’ post-secondary education;
Home renovations; and,
Investment opportunities.

There are several ways to access your home equity with refinancing, including:

Refinancing your mortgage;
Using a home equity line of credit;
Blending mortgages;
Extending mortgages; and,
Even using a combination of the above options.

Consolidate Debt

If you have any high-interest debts, you may choose to refinance your mortgage to pay off these debts. Mortgage interest rates are usually significantly lower than interest rates for car loans, credit cards, or lines of credit, so you will end up saving more over time by paying off these debts with a low-interest mortgage.

How To Refinance

Depending on your current mortgage, financial situation, and reasons for refinancing, you can refinance your mortgage in several ways. These include:

Breaking Your Mortgage Contract

If you want to switch lenders for a lower interest rate, or you want to access your home equity, you can break your current mortgage contract early, with a penalty, and get a new mortgage.

Opening a Home Equity Line of Credit

Whether you choose to stay with your current lender or switch to another, you can open a home equity line of credit to access your home equity whenever you need to. As with other lines of credit, you will need to pay monthly interest rates on your outstanding balance.

Blending and Extending Your Mortgage

Your mortgage lender may offer a blended mortgage rate and an extension on your amortization period as a mortgage refinancing option. A blended rate is a combination of your current mortgage rate and the current market rates for additional money you plan to borrow. But since the current market rate may be higher than competitive mortgage rates, you may end up with a higher blended rate. So you should consider how much you will save if you have a blended mortgage versus breaking your mortgage.

Weighing the Costs Of Refinancing

The costs of refinancing include penalties for breaking mortgage contracts, legal costs, and possibly higher interest rates with blended mortgages. However, your lender may be willing to cover the legal costs of changing your mortgage if your mortgage balance is more than $200,000.

Depending on the type of refinancing you choose, the benefits can certainly outweigh the costs, especially if you’re going with a lower interest rate mortgage. The amount of money you will save over time, and maybe even earn from your investments will make refinancing worth it.

Here are some of the major benefits of refinancing your mortgage:

Lower monthly payments if you can no longer afford your current mortgage payments due to unforeseen circumstances, such as loss of income;
Lower interest rates on your mortgage and by consolidating your high-interest debt;
Invest in your children’s futures by paying for their education;
Invest in your home’s value with renovations; and,
Invest in your future with investment opportunities.

Ready to start paying lower interest rates or renovating your home? Contact a mortgage broker to see which refinancing options you have. Your mortgage broker will determine the best option for you suited to your own needs and goals.

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