Here are the most common reasons home owners refinance their mortgages:
- Save money by obtaining a lower interest rate
- Pay off your mortgage sooner by shortening the term of the mortgage
- Convert your mortgage from a variable-rate to a fixed-rate, or vice versa
- Tap into your home’s equity in order to finance large purchases or expenditures – like vacations, education and renovations, or
- Simply to consolidate debt and in many cases improve monthly cash flow
Some of these reasons have benefits, while others may have potential pitfalls. Typically whether to refinance or not falls into two categories:
- Does the cost saving of refinancing outweigh the actual cost to refinance?
When you refinance, you pay off your existing mortgage and create a new one. Because you are breaking your mortgage mid-term your current lender will charge a penalty. Normally for fixed rate mortgages this penalty is the greater of three months interest or the interest rate differential payment (IRD). For variable rate mortgages this is simply three months interest.
- Does your home have enough equity built-up to support your refinancing purpose?
i.e., to consolidate other debt(s) into your mortgage at a lower interest rate, cover the cost of a renovation, pay for the kid’s education, etc…
When you’re considering refinancing your mortgage it’s important to determine whether your reason will offer a true benefit. The best way to do this is by working with a mortgage professional like The Mortgage Centre-XMSI who will help you analyze and determine if it makes sense given your current situation.
In CAAMP’s (Canadian Association of Accredited Mortgage Professionals) Annual State of the Residential Mortgage Market in Canada study for 2012 they highlighted that about 6% or 600,000 home owners took equity out of their homes in the preceding year. The average amount was $49,000, and represented a total overall withdrawal of almost $30 billion – with the most common reason for renovation purposes at $8.25 billion, followed by debt consolidation & repayment at $7.5 billion.
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly – also when used carefully, it can be a valuable tool in getting your debt under control and giving you financial “Peace of Mind”. Before you refinance take a careful look at your financial situation, and ask yourself:
- How long do I plan to living in this home?
- How much money will I save by refinancing?
- What are my overall financial goals?
A good mortgage professional is in the best position to walk you through this analysis process and help you determine if refinancing your mortgage does make sense.