Reasons to Refinance Your Mortgage

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A mortgage pre-approval is extremely beneficial in showing you, the home buyer, what value of home you can afford as well as the mortgage payments associated with various purchase prices. It also guarantees a mortgage rate for a set period of time, thus, protecting you against possible rate increases. You are not obligated to the bank or mortgage broker from whom you received your mortgage pre-approval, and there is no additional cost. So, there are very few downsides to obtaining a pre-approval. Read ahead to learn about why you should refinance your mortgage:

Take advantage of low interest rates

Do not let penalties scare you away. Do research and know the numbers. Breaking your contract for a lower interest rate can save you money over the long term, depending on the penalty and the amount of your outstanding mortgage. If you hold a variable rate mortgage, then expect to pay a penalty of three months interest, or if you hold a fixed rate mortgage, then you will pay the greater of three months interest or interest rate differential penalty (IRD).

Access equity in your home

By refinancing, you can access up to 80% of your home‘s value minus any outstanding mortgages. That means extra money for investment opportunities, home renovations projects, or your children’s future education. There are several ways to access this equity such as breaking your mortgage, taking on a home equity line of credit or combining and extending your mortgage with your current lender.

Consolidate your debt

If you have enough equity from your home’s value, you will be able to pay out high interest debt through a refinance. For instance, if you have a number of outstanding debts, such as a student loan, a car loan, a line of credit, or credit card bills, you may be able to consolidate all of these debts together into one larger payment through a variety of refinance options available to you.

How to Refinance Your Mortgage

There are several options available to you when considering refinancing, which include: breaking your mortgage contract early, taking out a home equity line of credit or something called ‘blending and extending’ your mortgage with your current lender.

Break your existing mortgage contract early

You would consider breaking your mortgage early if you wanted to get a lower interest rate or access equity from your home. Doing this eliminates your existing mortgage and allows you to take on a brand new one with any lender of your choosing.

Get a home equity line of credit

A home equity line of credit gives you access to the equity or value in your home at your own discretion. You are responsible for interest payments each month on the outstanding balance. You are able to access a home equity line of credit through your existing lender and a small group of other lenders.

Blend and extend your existing mortgage

Your existing mortgage lender may offer you something called a ‘blended rate’; meaning a combination of your current mortgage rate plus any additional money you borrow at current market rates. Blended rates are almost always higher than the most competitive mortgage rates on the market, so ensure that you compare the blended rate against the savings if you choose to break your mortgage.

Costs of Refinancing Your Mortgage

The cost to refinance your mortgage depends on the strategy you choose to employ in order to access equity from your home or lower your interest rate. No matter which strategy you decide to use, you will always incur some sort of legal costs due to the fact that a lawyer must change the financing on title. The good news is that if your mortgage balance is greater than $200,000, many brokers and lenders will cover this cost.

On the other hand, if you are breaking your mortgage in the middle of your term to access equity from your home or lower your interest rate, your lender will charge you a prepayment penalty fee. For fixed mortgage rates, this penalty is the greater of three months interest or the interest rate differential payment (IRD). For variable mortgage rates this is essentially three months of interest payments.