Refinancing a mortgage means swapping out your old mortgage for a fresh one, either sticking with your current lender or shopping around.
People do it for all sorts of reasons: snagging a better interest rate, tapping into home equity, or bundling up debts. But watch out – bailing on your mortgage early can slap you with a hefty penalty, making it a bit of a gamble. So, before you dive in, do your homework!
Why Should I Refinance My Mortgage?
1. Lower Interest Rates
If interest rates decrease from when you first got your mortgage, refinancing your mortgage lets you swap out your current mortgage for a new one with a lower rate. This could result in saving a substantial amount over the duration of the mortgage. You may be subject to prepayment penalties, so it’s best to consult with your mortgage broker about any hidden costs of refinancing.
2. Accessing Equity
Homeowners can use refinancing as a chance to access the equity accumulated in their home, tax-free. A mortgage refinance is generally capped at 80% of your appraised home value minus any outstanding mortgage. This can be achieved through breaking your current mortgage, utilizing a home equity line of credit (HELOC), or blending and extending your current mortgage. The money from refinancing can be used for tasks like renovating their home, consolidating debt or covering significant expenses, such as education costs.
3. Consolidate Debt
If you've got a good amount of equity in your house, you could leverage that equity to pay off high interest debts by refinancing your mortgage. For instance, if you're dealing with multiple debts like lines of credit or credit cards, there are several mortgage refinance choices that could help consolidate these debts. You can even merge debts like auto loans or personal loans to bring down your monthly payments overall. This is also known as debt consolidation.
Pros and Cons of a Mortgage Refinance
Pros of Refinancing
Access the equity built in your home.
Consolidate your debts to lower your minimum monthly payment & overall interest rate.
Get a lower interest rate, lowing your mortgage cost over time.
Cons of Refinancing
There can be hidden costs, including a prepayment penalty.
It can take you longer to pay off your mortgage.
The amount owing on your mortgage increases.
Costs of a Mortgage Refinance?
If you are breaking your mortgage in the middle of your term, your lender will charge you a prepayment penalty. For fixed mortgage rates this penalty is the greater of three months' interest or interest rate differential payment (IRD). For variable mortgage rates, this is simply three months' interest. Other costs to consider are legal costs, since the services of a lawyer will be needed and appraisal costs to confirm the value of your home.
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