When and When Not to Refinance Your Mortgage

By RateHub.ca

Just because you’ve signed on the dotted line doesn’t mean you’re stuck with your mortgage until the very end. Refinancing your mortgage can be a wise move, but it can also cost you thousands in prepayment penalties. Whether you’re looking at consolidating debt, or you’d like to take advantage of a lower interest rate, you should speak with your lender and find out how much it will cost you to escape early. But before you do that, let’s take a look at when it might make sense to refinance your mortgage and when it might not.

When to Refinance Your Mortgage

Consolidate Debt

If you’re up to your ears in consumer debt, rolling your debt together with your mortgage can be a smart move. With mortgage rates at all-time lows, there’s never been a better time to pay down debt – and doing so through your mortgage is a lot cheaper than paying nearly 20 per cent interest on your credit card. To consolidate your debt, you’ll obtain a new mortgage and use it to pay off the balance of both your current mortgage and your consumer debt. Not only will you have your high interest debt paid off sooner, you’ll save a bundle in interest in the process.

Low Rates

It’s no secret that mortgage rates are low right now – but how low are they in comparison to your current mortgage rate? If refinancing could put a significant dent in the amount of interest you’ll pay over the life of your mortgage, it could be worth paying the penalty to get out of your current term and enter a new one. To find out if refinancing to a lower rate will actually save you money, you can run your numbers through a refinance calculator. If the savings outweighs the penalty, you should speak to your lender and find out how to move forward.

Take Out Equity

Whether you’re looking at a major renovation or eyeing a rental property, refinancing is a great way to tap into what is most likely your biggest asset – your house. You can borrow up to 80 per cent of the value of your home, minus what you still owe on your mortgage. For example, if your property is valued at $450,000 and the remaining balance on your mortgage is $200,000, you can borrow up to $160,000 ($450,000 x 80% - $200,000). Taking equity out of your home is a great way to borrow money at a low interest rate.

When NOT to Refinance Your Mortgage

You Can’t Afford the Fees

Refinancing your mortgage involves breaking your current mortgage term and getting a new one to replace it. Because you’re breaking one term, you need to pay a prepayment charge (penalty fee). If you have a fixed rate mortgage, you’ll pay the greater of three months’ interest or the interest rate differential. With a variable rate mortgage, you’ll just pay three months’ interest. Both options can cost thousands of dollars and you’ll likely also have to pay legal and lender’s fees on top of that. If you can’t afford the fees involved, refinancing may not be an option for you.

You’re Moving

If there’s a chance you’ll be moving soon, especially out of the province or out of the country, it’s unlikely that you’ll be able to recover the fees involved in a refinance. Furthermore, if there’s a chance you’ll be selling and paying off the rest of your mortgage while you’re in your new term, you’ll have to pay the penalties all over again.