Refinancing Your Mortgage – Why, How and When

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You may be thinking about refinancing your mortgage. Mortgage rates are fairly low right now, so why not take advantage of them? But is that really a good idea? Let’s take a closer look at the why, how and when of mortgage refinancing.

Why refinance?

• Get a mortgage at a lower rate than your current mortgage.
• Reduce payments – restructuring your current mortgage and paying it off over a longer period can reduce your monthly cash flow obligations.
• Consolidate debt by increasing your mortgage – to obtain a lower interest rate than conventional loans or credit cards, lower overall monthly payments, and lengthen the repayment period (mortgages can be amortized up to 25 years).
• Improve cash flow – to make monthly payments or balance your budget.
• Equity take-out – that can be used for anything you wish, from renovations to purchasing a car or a second property.

All of this will then help you with other areas that need review, such as investing, insurance and establishing an emergency reserve.

How To Refinance?

• Penalties and pre-payment charges – are almost a given when you refinance an existing mortgage before the end of your mortgage term (typically, five years). These charges are meant to compensate the lender for lost income and other costs associated with the early payout of your mortgage – and they can offset any gains you might expect.
• Minimize your refinancing penalty costs – by prepaying as much as 20% of your existing mortgage (most lenders offer the option of making a lump sum contribution to the mortgage – usually from 15% to 20% -- without penalty) or, if you are within the first three years of a five year term, you may be able to ‘blend’ your existing mortgage interest rate into a new, lower rate and extend your mortgage term that may provide a slight advantage or, at worst, break even’.

When to refinance?

• If you intend to add a considerable amount to your refinanced mortgage, the lower rate would apply to all ‘new’ money and the extended term of your new loan – meaning that your ‘blended’ rate may be significantly lower.
• Some lenders will reduce the penalty amount for current clients who refinance with them and some offer promotions that assist with the payment of penalties when the mortgage is transferred to them from another lender.

• This simple calculation will tell you if refinancing makes sense for you:
• Calculate the total projected interest costs for your existing mortgage.
• Calculate the total projected interest costs for a refinanced mortgage, including all penalty charges which are typically added to the mortgage.
• Choose the option with the lowest overall interest cost.

Is mortgage refinancing right for you?

Ask me how to start today – and get the answer that makes the best sense in the context of your overall financial life and objectives.

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell anything.