When Does Refinancing Make Sense?
In this rate environment, fixed rates are at an all-time 50-year low. Sometimes it's a good idea to take advantage of lower interest rates, but there are also many other reasons why you may consider mortgage refinancing. The following lists some of the other reasons:
- Getting cash out of your property (also called Equity Take-Out)
- Paying for home renovations, investments, education, etc.
- Getting a lower interest rate to decrease your mortgage payments and save money
- Choosing better terms and options for your new mortgage
- Combining several mortgages into one
- Consolidating debts
- Getting a Line of credit to get access to money for emergency situations
However, the above reasons may only be worth the penalties and costs you may incur if refinancing ACTUALLY makes sense. The following illustrates some of the cases where it is worth refinancing a mortgage:
- Rates have gone down and you may want to lower your monthly payments. If you have signed up for a mortgage two to three years ago when fixed rates were higher, the Interest Rate Differential penalty might be low. If the savings are there, the mortgage could be worth refinancing.
- You have a variable/adjustable rate mortgage or a line of credit that has been recently increased to prime plus one or two per cent. Fixed rates have gone down recently and you may want to switch your mortgage to a low fixed-interest rate now while they are low.
- Your house/property has gone up in value or you have paid down a significant amount of the principal of the mortgage. That means there is "room" for you to take money out from the equity in your home for investments, renovations, debt consolidations, buying a second home, etc.
- Your credit rating has improved. At the time you applied for your mortgage, you may had little credit history or bruised credit from having past collections and/or late payment issues. The interest rates you qualified for were higher due to your low credit rating. If your score has improved since then, you may now be eligible for a better, lower rate if you refinance, and possibly increase your mortgaged amount as well.
- Your income or your family's has increased. Maybe your spouse returned from maternity/paternity leave and is back into the work force. Adding his/her additional income to qualify for a new mortgage, or add a line of credit to your property, may enable you to take equity out of your house for investments, renovations, consolidate debts etc.
- You have high-interest debts and you can save more money every month and possibly improve your credit rating, if you consolidate them into single, low monthly payments with your mortgage. (It is worth noting that if your high-interest debts are usually on your credit cards or loans that show up on your credit history, you may have a low credit score that may affect your ability to qualify for a low-interest mortgage.)
- Last but not the least, the savings you will get is worth more than the penalty you will pay for switching to another lender or refinancing your mortgage. Sometimes, this penalty can be rolled into your new mortgage as well. As experienced mortgage professionals, we can provide you detailed analysis to help show you if there is a benefit to refinancing your mortgage. Call us now at 1-888-853-8372 to book a free consultation.
Remember, there may be closing costs and penalties involved with refinancing. Usually, the longer you stay in your home, the more you will benefit as the monthly savings you incur will pay for these costs over time. If the time you stay greatly exceeds the time it takes to make up for the costs you spent refinancing, then you have incurred savings. If not, then it may not be worth your time to go through with it. To find out more about penalties, check our answer to the faq "Is there ever a good time to "break" my closed mortgage and pay the prepayment penalties?."
