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When to Refinance Your Mortgage

Refinance A Mortgage, Looking at the Options & Costs

Homeowners usually refinance a mortgage by paying off one loan with another. In most cases, this is done so homeowners can save with lower interest rates with a new mortgage, add to their home equity faster, and pay off their mortgage quickly. That being said, people may also refinance a mortgage to access home equity for large investments, or to consolidate high-interest debt.

How and why you would refinance a mortgage depends on your own financial situation, how long you plan to live at your current house, and whether the savings outweigh the costs. If you are considering refinancing your mortgage, consult with a trusted mortgage broker to help weigh your options.

Refinance Mortgage - Ottawa, Ontario

How to Refinance

There are a few common options to refinance a mortgage. Speak with your mortgage broker and go over the costs and savings you can find in each option. In brief, though, you can:

  • Break your existing mortgage—you can break your current mortgage contract early and get a mortgage with a lower interest rate, but penalties will apply.
  • Use a home equity line of credit—access your home equity when you need it, and pay monthly interest-only payments on it.
  • Blend and extend existing mortgage—your mortgage lender may offer you a blended mortgage rate that is a combination of your existing mortgage rate and additional money you borrow at current interest rates. Since blended rates are usually higher than competitive mortgage rates, make sure the higher rates are worth it for refinancing your mortgage.

Why Would You Refinance Your Mortgage?

There are a few common reasons why you might refinance your mortgage:

Lower Interest Rates

Refinancing your mortgage for a lower mortgage interest rate can save you money in the long term. You can build equity at a faster rate by paying off more of the loan’s principal and spending less on interest. You can also decrease your monthly mortgage payments.

With lower interest rates, you can shorten a fixed-rate mortgage term without paying too much more on your monthly mortgage payments. This means you can pay off your mortgage faster, and be mortgage-free that much sooner.

Refinancing a mortgage is only worth it if what you will save is greater than what you will spend on refinancing fees. These fees include the penalty for breaking your mortgage and legal fees. With a variable rate mortgage, penalties are usually a total of three months’ interest. With a fixed-rate mortgage, the penalty is the greater amount of these two: three months’ interest, or the interest rate differential penalty.

Fixed-Rate Mortgages Vs Variable-Rate Mortgages

If variable-rate mortgage (VRM) rates increase and become higher than fixed-rate mortgages (FRM), you’re better off securing an FRM. They can help you save money and ensure predictability with your rate in the future. If VRM rates are low and continue to decrease, you can save by switching from a fixed to a variable rate. Switching to a VRM is usually recommended for homeowners who don’t plan to stay in the same house for a long time.

Tapping into Home Equity

Homeowners will sometimes refinance their mortgages to use home equity to pay for large purchases. They can access up to 80% of the home’s value (less the outstanding mortgage) for home renovations or their kids’ post-secondary education.

They may find that the interest rates for their mortgages are much lower than that of other loans. And they may see this as an investment into their home values and their kids’ futures.

Using home equity can be done through:

  • Breaking your mortgage (and getting a new one);
  • Using a home equity line of credit; or
  • Blending and extending your mortgage with your current mortgage lender.

Doing so will often increase the mortgage term, though, so homeowners must weigh their options when deciding to refinance their mortgage for large purchases.

Debt Consolidation

It is usually wise to pay off high-interest debt (such as credit cards) with low-interest debt (mortgages, lines of credit) so you will save on interest. But debt consolidating with mortgage refinancing is only a wise option if homeowners can resist racking up more high-interest debt once they’ve paid it off.

If not, then they will be in a worse debt situation than before—wasted refinancing fees, loss of home equity, and more years spent paying off higher interest payments on both the mortgage and high-interest debt.

Savings Outweigh the Costs

Refinancing your mortgage can be a wise decision if:

  • Your monthly mortgage payments are reduced;
  • Your mortgage term is shortened;
  • You can build equity faster; or
  • You are carefully consolidating debt.

However, the savings should outweigh the costs of refinancing. So, before you do so, consider the costs when tapping into home equity and consolidating debt.

Depending on your financial situation, it may cost you more in the long run to refinance your mortgage. But if you are cautious with your finances, it can be a wise decision. Weigh these options with your mortgage broker to determine which financial option is best for you.

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