The process of refinancing your mortgage involves breaking the terms of your existing one, to start a new one with either your current lender or a new lender. There are lots of reasons why Canadians may decide to pursue a mortgage refinance including debt consolidation, home improvement financing or to access a lower interest rate. It’s important to note that choosing to refinance does come with some level of risk, as it will cause you to incur a large prepayment penalty. For this reason, it’s important to understand when refinancing is a good decision, and when it may not make sense.
Reasons To Refinance Your Home Mortgage
Refinancing can help homeowners in a multitude of ways so understanding how it will impact your personal finances and what problems it can help you solve, is a great first step to determining if it’s the right fit for you. There are many reasons Canadians may choose to refinance their home and some of the most common ones include:
Debt consolidation is the process of combining debt from multiple sources into one place; so taking credit card debt, personal loans etc. and moving them all into one location with one overarching interest rate. Refinancing your mortgage to consolidate debt can help you make a big dent in high-interest rate commitments like car loans or credit cards that can cost a lot in interest payments as you work hard to pay back what you owe. When you choose this route, your original home loan will be replaced with one that includes repayments for all of your other debts. Be sure to ask questions and pay attention to the new loan terms and its total interest costs to ensure it’s a wise financial decision for you.
Pay For Home Improvements
When you own a home, it can seem like there are infinite home improvement projects to take on, but more often than not, your budget just won’t allow for it. Refinancing your home mortgage can free up extra cash to pay for renovations that will, if planned properly, increase the overall value of your home and provide a solid return on investment (ROI). If you’re thinking about refinancing to take on home improvement projects, make sure you set yourself up with a realistic/accurate budget and do your research to learn more about which improvements are more likely to bring with them a solid ROI.
Lower Your Interest Rate
Taking advantage of a current low interest rate is often a great reason to refinance a home mortgage. Reducing your interest rate by even .5% may seem minimal, but this deduction can help you save more money with lower monthly mortgage payments and build up your home equity faster.
Pay Off Your Loan Faster
When you refinance your mortgage, you may be able to get a lower interest rate. Some mortgage lenders might allow you to extend the length of your mortgage before the end of your term. Lenders call this early renewal the “blend-and-extend option” because your old interest rate and the new term’s interest rate are blended. When your interest rate is lower, you have the option to reduce the amount of your regular payments to alleviate any financial stress you may be encountering month-to-month. However, if you decide to keep your regular payments the same, you can actually pay off your mortgage faster.
Get Rid Of PMI (Private Mortgage Insurance)
If your current mortgage is already insured with mortgage default insurance, you might have to continue paying these premiums when you renew your mortgage if your loan amount has increased or you extended your amortization period. It’s possible to avoid CMHC mortgage insurance if you refinance your mortgage and leave at least 20% in the home. Be sure to speak with your lender for specific terms and conditions relating to your mortgage insurance policy.
Reasons Why You Shouldn’t Refinance Your Home Mortgage
Refinancing your home should only be done when you’re gaining something positive as a result. Below are a few scenarios where you may want to avoid refinancing until it makes financial sense:
Choosing to refinance in order to fund a luxury purchase would not be wise, as the benefits of a refinance are felt over the long term and aren’t a solution to cash needs in the immediate short term. A home equity line of credit (HELOC) may be a more suitable alternative to a refinance because it allows you to borrow up to 80% of the value of your home, but it differs in that you can borrow and repay freely without having to pay fees each time.
Recent Home Purchase
Unless you put 20% down on your new home, it’s likely you will have too little equity built up in your home to take cash out, which could result in higher interest rates and lower overall savings.
Fallen On Hard Financial Times
If you find yourself in a less-than-ideal financial situation, it’s likely that a mortgage refinance is not the best option for you. Choosing to break your current mortgage will mean encountering hefty fees that are only worthwhile if they’re offset by a lower interest rate over a longer period of time. If you’re unsure if you’ll be able to stay in your current home or are in need of cash in the short term, other lending options might be a better fit.
Mortgage refinancing can be a great solution for some Canadians, but it isn’t always the right fit for everyone. If you’re considering it as an option, be sure to do your homework by asking your lender all the right questions and gaining access to all the details you need to make an informed financial decision. If you want to learn more about mortgage refinancing and what options you may have available based on your personal situation, reach out to our qualified team members.