Should I Refinance My Mortgage?
While refinancing a mortgage generally means breaking your existing mortgage and paying a prepayment penalty, it could be worthwhile if you get a lower interest rate, tap into your home equity or consolidate debt.
While the benefits of refinancing can sometimes be clear, not all situations may be so straightforward. If you’re asking yourself, “Should I refinance my mortgage?,” here’s what to consider as you make your decision.
6 signs it's time to refinance your mortgage
1. You have a good use in mind for your equity
Refinancing will be most beneficial if the cash you access is put toward uses that strengthen your household finances, like eliminating debt or paying for items that can be seen as investments: home renovations, higher education or even a rental property. Refinancing to buy less necessary things, like a boat or a vacation, might not be worth the extra interest you'll wind up paying.
2. You're nearing the end of your term
The amount of time left in your mortgage term can significantly impact your bottom line when refinancing.
Depending on your mortgage type, you might be charged a prepayment penalty based on your lender's interest rate differential (IRD), which is calculated using the number of months you have left in your mortgage term. The less time left in your term, the lower your prepayment penalty should be.
3. You've built up significant equity
If you're refinancing to access cash, it's generally only beneficial if you have a fair amount of equity in your home. Otherwise, the prepayment penalty and other fees you pay may eat up most of the equity you hope to tap into.
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4. Mortgage rates have fallen
If rates have come down significantly since you took out your current home loan, refinancing to score a lower rate can save you money — if the lower interest charges outweigh your prepayment penalty.
5. You need to arrange a lower mortgage payment
If your current mortgage payment is becoming unmanageable, you could refinance to extend your amortization period. A longer amortization will result in lower monthly payments, but it will also add years of interest charges to the overall cost of your mortgage.
6. Your credit's in good shape
Refinancing is generally a better option for borrowers with stronger credit profiles.
If your credit score is low, you may have to refinance with an alternative lender that charges higher interest rates. And if you've recently had trouble paying down your debts, refinancing and taking on even more debt may be risky.
If a mortgage refinance isn't the right move at this time, look into home equity loans or home equity lines of credit as possible alternatives.
Frequently asked questions
Should I refinance my mortgage now?
Should I refinance my mortgage now?
The decision if and when to refinance is a personal one and should be based on whether you qualify for refinancing and your reasons for doing so. When interest rates are lower than they were when you took out your existing mortgage, refinancing may be a good idea, since it could save you money in interest in the long term. However, in an environment of rising interest rates, such as the situation in Canada in 2023, refinancing may not be as beneficial.
Another reason to consider refinancing is your budget. If you lack cash flow or you’re paying high-interest debt, refinancing could give you access to the equity you’ve built in your home. Making use of this equity could help you consolidate debt or manage your household budget a little more easily.
That said, refinancing to borrow more money is sometimes compared to treating your home like an ATM, which is not ideal because you’ll eventually need to pay those funds back. In addition, refinancing comes with many fees, such as legal fees, a home appraisal, mortgage registration, prepayment penalties and more. You’ll need to figure these costs into your calculations when deciding whether it’s worth refinancing your mortgage.
How often should I refinance my mortgage?
How often should I refinance my mortgage?
You can refinance your mortgage whenever you want, as long as you meet the eligibility requirements. That said, you likely should only do so if you have a specific reason in mind. Refinancing comes with costs like prepayment charges and other fees. It could also potentially extend the length of time it takes to pay off your mortgage and even cost you more in interest over the full repayment period.
Should I refinance my mortgage to pay off debt?
Should I refinance my mortgage to pay off debt?
Refinancing your mortgage to pay off other debt can sometimes make sense. That’s because your mortgage is a form of secured debt, so you’ll usually get access to lower interest rates compared to other forms of debt, such as a personal line of credit. Consolidating your debt into a refinanced mortgage can potentially help you save money, and can also mean you only need to manage one bill payment.
Let’s say you have high-interest debt, such as credit card balances or a personal loan. Refinancing your mortgage could allow you to borrow enough money to immediately pay off that high-interest debt. This strategy would leave you with the same amount of debt, but consolidated into one loan (your mortgage) with a lower interest rate.
Should I refinance my mortgage for a lower interest rate?
Should I refinance my mortgage for a lower interest rate?
When interest rates drop, the savings you could get from refinancing your mortgage could make it worth breaking your existing mortgage. Most lenders have online calculators, so you can quickly determine what penalties you would pay to break your mortgage and refinance. If the overall savings appear to be significant, it may be worth looking more seriously at refinancing.
Should I refinance my mortgage to pay for home improvements?
Should I refinance my mortgage to pay for home improvements?
Refinancing your mortgage to free up cash to pay for home improvements can be worth it if you have equity built in your home but limited savings. The interest rate offered by refinancing is typically lower than that on credit cards and personal loans. Refinancing could allow you to renovate your home while potentially improving its value of your home. Again, it’s a good idea to compare the costs of refinancing to those of other borrowing options, such as a home equity loan or HELOC.
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Clay Jarvis
Clay Jarvis
Clay Jarvis