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As your financial situation and the economy change, you might be wondering, “should I refinance my mortgage?” Keep reading to learn reasons why you may want to refinance your mortgage now, and when it’s better to wait.
Refinancing a mortgage involves swapping out your current mortgage loan for a new loan that saves you money. Often, homeowners consider refinancing their mortgage if a new loan’s interest rate will be at least 0.5-1% lower than their current mortgage’s interest rate. However, this seemingly straightforward answer isn’t always the best strategy. It’s important to consider several different factors so that your plan to refinance your mortgage doesn’t end up costing you more.
Refinancing your mortgage can be a good way to save money. But factors like your current mortgage terms, the state of the economy and your personal financial situation should all be considered when deciding if it’s the right move for you. Here are 6 reasons why you should consider refinancing your mortgage:
Getting a lower interest rate is one of the biggest reasons you should refinance your mortgage. Let’s say you get a mortgage for $380,000, amortized over 25-years with a fixed-rate of 3.5%. Your monthly payment would be approximately $1,897.23. But if you lower the interest rate by 0.7% to 2.8%, the monthly payment would fall to about $1,759.56 — assuming the financial health and credit history of the borrower remains the same. In this example, a 0.7% drop in the interest rate would yield roughly $1,652.04 in savings per year, and a total savings of $41,298.89 in interest over the life of the mortgage.Consider refinancing your mortgage to lock in a lower interest rate if your personal finances, including credit history and income, are better than when you first took out your mortgage.
Shortening the amortization period of a mortgage is another reason it might be worth exploring mortgage refinancing options. When you shorten your amortization period, you commit to paying off your mortgage earlier, which means you’ll be paying less interest over time. For example, during the first 10 years of a 25-year mortgage, the bulk of a mortgage holder’s payments go towards paying interest. For example, on a home valued at $380,000, moving from a 25-year fixed-rate mortgage to a 15-year fixed-rate mortgage with a 3% interest rate would increase monthly payments from $1,798.33 to $2,620.82. While securing a shorter amortization period increases your monthly repayments, you’ll save thousands of dollars in interest over the life of the mortgage.
Switching between a variable and fixed rate mortgage can help you lock in the best interest rate depending on how the prime interest rate fluctuates.
Other types of mortgages that you should consider refinancing to or from include open and closed mortgages, convertible mortgages, hybrid mortgages and adjustable mortgages.
If you’ve built up some equity in your home and you’re looking to access it – either through a home equity loan or a home equity line of credit – you could refinance your mortgage in order to gain access to some cash. This type of refinancing technically won’t save you money – unless you’re going to use the money for an investment or income-producing purpose and make more than you’ll now have to repay in interest charges over your new longer loan term. For example, doing renovations on a rental property can have tax-saving benefits which could offset any extra interest you’ll pay on your new, higher mortgage.
Much like accessing equity in your home, you could use the funds from refinancing your mortgage to consolidate debts and pay off higher cost debts. While again you’ll have to pay more interest on your mortgage, the rate could be lower than on other debts – which ultimately will end up saving you money in the long run. However, it’s important to be aware of the potential debt trap here. Often, people who have racked up a lot of debt in areas like credit cards, payday loans or car loans will end up going into debt again because they have the available credit after paying down their debt from refinancing. If your spending habits don’t change, you could end up with more debt then what you owed before you refinanced your mortgage.
Your mortgage loan term is the number of months or years that you have your interest rate locked in for. Loan terms typically last anywhere from 6 months to 10 years, with most homeowners settling on a 2-5 year term. Once your loan term ends, you’re required to refinance your mortgage and take on a new interest rate. While many homeowners refinance for a new rate with their current lender, you should shop around and compare your options – possibly scoring an even lower rate.
Comparing your available options can help you decide if you should refinance your mortgage and lock in a great interest rate. To help you out, we’ve gathered together a range of mortgage providers in the table below who all offer refinancing.
Now that you know the 6 reasons why you should consider refinancing your mortgage, here are some factors to think about when deciding if refinancing your mortgage is worthwhile.
Like with any loan application, you’re not guaranteed to be approved for mortgage refinancing. Mortgage refinancing lenders consider factors like your credit score, assets, debt and income when deciding if you should be approved and at what interest rate.
Lenders often determine your eligibility by calculating your Total Debt Service (TDS) ratio – which is the percent of your monthly household income that’s used to cover both housing costs and any additional debts. Experts suggest that you should try to keep your TDS ratio under 42% for the best chance of approval. You can use the CMHC’s calculator to find out what your TDS ratio is.
Once you’ve narrowed down your list of mortgage refinancing providers, especially if you’ve settled on a new lender, you’ll want to ask the following questions:
The answers to these questions will help you determine the suitability of a mortgage product and whether it makes sense to refinance now and with a specific lender.
When done right, refinancing your mortgage can save you a lot of money in the long run. But it’s a big decision, so carefully consider why you’re doing it, whether it’s going to save you money and whether you can find a lender offering more competitive rates and terms.
If you want to learn more about how refinancing mortgages work, head to our comprehensive guide here.
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