When is a Good Time to Refinance Your Mortgage?
Refinancing a mortgage means paying off your existing loan and replacing it with a new one. There are many reasons why homeowners refinance, to obtain a lower interest rate, to shorten the term of their mortgage, to convert from an adjustable rate mortgage to a fixed rate mortgage, or vice versa, to tap into home equity to raise funds to deal with a financial emergency, finance a large purchase, or consolidate debt. Since refinancing can cost between 2% and 5% of a loan’s principal and, as with an original mortgage, requires an appraisal, title search, and application fees, it is important for a homeowner to determine whether refinancing is a wise financial decision. While speaking with a mortgage broker, like Ryan Michell in Regina, is always the best choice, here are a few ways to decide if refinancing is the best choice for you.
Refinancing to Secure a Lower Interest Rate
One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance. Reducing your interest rate not only helps save money, but it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. For example, a 30 year fixed rate mortgage with an interest rate of 5.5% on a $100,000 home has a principal and interest payment of $568. That same loan at 4.1% reduces your payment to $483.
Refinancing to Shorten the Loan’s Term
When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan that, without much change in the monthly payment, has a significantly shorter term. For a 30 year fixed rate mortgage on the same $100,000 home, refinancing from 9% to 5.5$ can cut the term in half to 15 years with only a slight change in the monthly payment. The payments change depending on the rate etc., so doing the math and seeing what works is best to do beforehand.
Refinancing to Tap Equity or Consolidate Debt
While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never ending debt. Homeowners often access the equity in their homes to cover major expenses, such as the costs of home remodelling or a child’s college education. These homeowners may justify the refinancing by the fact that remodelling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source. Many homeowners refinance to consolidate their debt. At face value, replacing high interest debt with a low interest mortgage is a good idea. Unfortunately, refinancing does not bring automatic financial prudence. Take this step only if you are convinced you can resist the temptation to spend once the refinancing relieves you from debt.
Overall, the best way to determine if refinancing is best for you, is to speak with an expert. Ryan Michell is a mortgage broker in Regina who is an expert in refinancing mortgages and can work with you to ensure you make the right decisions.