Why consider refinancing?

First off, let’s look at the common two types of refinancing: within your term and at the end of your term. In both cases there are several fees involved throughout the refinance process which we discuss in the costs of refinancing. 

But, why would I want to give up my old mortgage and take out a new one?

That’s a great question. You might want to consider a mortgage refinance for several reasons. Here are a few common ones:

·    Access the equity in your home renovations.

·    Access the equity to pay off high interest debts, or reduce monthly payments. 

·    Access the equity to access cash (example: for down payment to another property or remove borrower from title – divorce)

·    Lower your interest rate

·    Lower your monthly payment or increase your available monthly cash flow.

·    Shorten the mortgage term

·    Lengthen the mortgage term

When not to refinance?

Although the choice to apply for a refinance always belongs to the borrower, it may not be a good financial move for everyone. Here are a few examples of times you might want to leave your original mortgage intact:

·    Refinancing could be a bad move if you’re paying off other, higher cost debt without a solid plan for avoiding a repeat of the same situation. If you refi and tap your equity, pay off your credit cards, and then run the balances back up, your financial situation will only be worse.

·    Refinancing may not be a good move if your new mortgage term stretches into your retirement and you know your income will go down. Thirty years is a long time. Think about what you want your budget to look like in the last ten before you make your decision.

·    Refinancing for a lower rate may not be a good move if you plan to sell the home before you break even on mortgage costs or penalties for breaking your existing mortgage.  If this is the case, speak to your mortgage advisor or lender to see what other options are available to buy time when you do sell, or avoid the penalty fees. 

·    You might want to postpone your refinance if your credit isn’t excellent since you could take steps to improve your credit score over the next six to 12 months. A better score could get you a better interest rate so waiting could be a better choice. 

Refinancing can be both a money-saver or a money-loser

If interest rates have fallen since you took out your mortgage, refinancing might help you get a lower rate. Whether you save money on your monthly payment, the total interest charges over the life of the mortgage, or both depends on the refinance loan terms.

Example:

Say you have 16 years left on original 30 year amortization mortgage with a balance of $250,000, and you decided to refinance your current rate 3.15% to a lower rate 2.59% (both 5yr fixed terms), but also extend the amortization to 30 years. The result is you could lower your monthly payments of approx. $650.00 per month.  Great, right?

Not really, starting over with a new 30-year loan puts you back at square one in terms of paying off the mortgage. Paying the first mortgage for 14 years and the second mortgage for 30 years will result in more than $50,000 of additional interest charges. Over time, this is generally a money-losing scenario. 

As you can understand, refinancing only to obtain lower  rate is a much easier calculation, but just keep in mind not just on rate, but also the amortization when working with you mortgage broker/lender. 

Calculating the break-even point

It’s important to understand the costs of your mortgage because a refinance is not guaranteed to save you money. Mortgages are not free.

Let’s go back to our hypothetical example. You take the 20-year mortgage mentioned above and your closing costs amount to 2 percent, or $4,082. With a monthly out-of-pocket savings of $73, you’ll recoup your closing costs in about 56 months. That’s your break-even point. If you sell the home sooner, you could lose money by refinancing to the lower rate.

You could tap into your home equity with a cash-out refinance (but you might not want to)

With a cash-out refinance, you get a new mortgage for more than you owe on the home. The difference represents your equity. At closing, you get the equity in the form of a cheque.

So you might be wondering why you might want to consider taking yours out of your home. After all, building equity builds wealth, right?

The simple answer is that a cash-out refinance can put cold, hard cash in your hands, and that may be a priority for some people. It’s money you could use to:

·    Buy an investment property (This is our favourite. Make sure you subscribe to our newsletter, as we will show you 4 Ways To Win by owning an investment property.  The actual ROI (Return on Investment) will shock you.  

·    Consolidate or pay off debt, including student loans

·    Make home improvements or repairs

·    Cover college expenses to go back to school (or pay for education expenses for your kids)

·    Invest for retirement. 

·    Buy a second home 

·    Pay medical expenses

·    Meet working capital needs if you own a business

…or cover just about any other expense.

The amount of equity you can access with a cash-out refinance is typically 80% of the value of the property at the time of refinancing (80% Loan to value LTV).

Downside to cash-out refinance

Some people say no debt is good debt. If your goal is to work toward total debt freedom, you might want to think twice about increasing the amount of money you owe on your home.

You should also think twice about using a mortgage secured by your home to pay for things unrelated to the home and its value. Want that addition? Okay. That addition may add value to your home. If you can’t pay the mortgage, you might be able to sell it and recover all the money you owe. On the other hand, if you want to pay your child’s or grandchild’s tuition, there might be a better financial strategy to explore. 

Remember that when you take a cash-out refinance, you own less of your home. If you decide to sell the home before the mortgage is paid off, you may not pocket as much money as you would have if you had stayed in your original mortgage.

What does it cost to refinance a mortgage?

The chart below outlines which fees need to be paid under each circumstance. You can also see how much refinancing your mortgage will cost you, by using our mortgage refinance calculator.