Why You May (Or May Not) Want To Refinance Your Mortgage

Refinance mortgage

This is a guest post by the experts at Ratehub.ca

As mortgage rates have come down this year because of a couple of Bank of Canada rate cuts, you may be wondering if it’s time to consider refinancing your mortgage.

Reasons For Refinancing

There are three main reasons why you might want to refinance your existing mortgage:

  1. Take advantage of lower interest rates. If you’re three years into a five-year term with a fixed rate and mortgage rates for the same term are now considerably lower, refinancing can save you money and potentially lower your monthly mortgage payment. If you have a variable rate mortgage, you may want to lock in at today’s low rates and stabilized your mortgage payments over the next few years.
  2. Get access to equity in your home. If you’re thinking about renovating your home or buying an investment property, you may want to access your home equity (the value of your home minus your mortgage balance) to help pay for them.
  3. Consolidate debt. If you carry a credit card balance, have personal loans or a line of credit, you can combine your higher-interest debt into your mortgage loan. Consolidating debt will allow you to lower your monthly payments as well as your interest rate. Keep in mind that the amount of debt you have will still remain the same.

Steps For Refinancing

Whether you’re currently having trouble making regular payments on your mortgage and other debts, or just want to lower your interest costs, you need to decide if refinancing makes financial sense both now and after refinancing. To ensure that you take full advantage if you do decide to refinance you should always:

  • Shop around: Look for a lender with the best mortgage rates. Choosing a provider with a lower rate than your current lender could save you money in the long run.
  • Calculate the benefits: There are both pros and cons to refinancing your mortgage. The benefits of refinancing could save you hundreds of dollars a month.

Let’s assume you’re two years into a five-year, fixed-rate mortgage with a remaining balance of $200,000 and a 25-year amortization. Your existing rate is 3.5% but rates have since fallen to 2.38% (as of October 16, 2015). We used RateHub’s mortgage refinance calculator to determine how much you could save:

Status quo Refinancing
Mortgage amount $200,000 $200,000
Mortgage interest rate 3.5% 2.38%
Monthly payment $883 $884
Interest cost $20,270 $13,584
Interest savings (for remaining status quo-term) $6,686
One time refinance penalty $1,750
Net savings   $4,936

As you can see, your interest savings will be $6,686 but you’ll also have to pay a refinance penalty of $1,750. That will reduce your net savings to $4,936 or $1,646 a year over the next three years. In this case, it pays to refinance.

Reasons For Not Refinancing

While there are many reasons to refinance your mortgage, there are also reasons why you shouldn’t:

Costs Are Too High

As noted above, there is a penalty for refinancing your mortgage. In addition to this fee, there are often legal and mortgage registration fees. Your new lender will sometimes pay this so there’s usually only the refinancing penalty you’ll need to worry about.

Let’s use the same example above but instead assume you’re three years into the mortgage. Using RateHub’s calculator, we found the following:

Status quo Refinancing
Mortgage amount $200,000 $200,000
Mortgage interest rate 3.5% 2.38%
Monthly payment $883 $884
Interest cost $13,650 $9,202
Interest savings (for remaining status quo-term) $4,448
One time refinance penalty $8,800
Net savings (net loss)   ($4,352)

In this example, you’ll save $4,448 in interest costs but you’ll have to pay a penalty of $8,800. This time it’s not worth refinancing your mortgage.

Moving Plans

If you plan to move in the short-term, it might not be worth refinancing your mortgage because you’ll break this mortgage and then need to break it again in the near future.

Treating Your House Like A Piggy Bank

If you are refinancing to pay down debt and have a tendency to spend more than you make, you might end up needing to refinance again in the future. You could get trapped in a debt cycle if you tend to live beyond your means. If you are considering refinancing to deal with other debts, consider all your options.

While refinancing your mortgage may seem like a good way to save money, you should weigh both the pros and cons before making any decision.

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