Making the decision to refinance your mortgage is a big step, and while it does have the potential to save you a lot of money over the term of your mortgage – thousands of dollars in some cases – it does come with risks that you should be aware of before making any final decisions.
Below are the benefits and disadvantages of refinancing your mortgage:
- You get the chance to consolidate your debt with a lower overall rate
- You can access equity from your home
- You may get a lower interest rate and save money
- The penalties associated with refinancing may outweigh the savings
- When your debts are consolidated, the incentive to pay it down faster diminish
How can you refinance your mortgage?
If you decide, after consulting with a professional financial advisor or mortgage broker, that refinancing your mortgage has more benefits than disadvantages, you can choose one of several ways to carry it out:
- Break your current contract, early
If you wanted to get access to a lower rate of interest or access equity from your home, you could consider breaking your mortgage contract early. Your existing contract becomes null and you take on a new one with another lender; a process a qualified mortgage broker can help you with. However, you will likely incur a prepayment penalty from your bank, so it’s important to discuss this with a mortgage expert in detail, to determine whether it would be financially viable.
- Add a home equity line of credit (HELOC)
This gives you access to the equity from your home, with a HELOC functioning in a similar manner to a credit card account, but with significantly lower interest rates because it’s a secured loan. Taking money from your HELOC means that you’re responsible for monthly interest-only payments on the outstanding balance, and your existing lender along with a few others, will be able to help you access this line of credit.
- Blend and extend your existing mortgage
Blending your existing mortgage rate and any extra money you borrow at current market rates, a ‘blended rate’ might be offered to you by your current lender, but their rates are typically higher, so always seek professional advice before making the decision to do this.
What are the costs associated with refinancing your mortgage?
Depending upon the type of strategy you use to access equity or lower your interest rate, the cost of refinancing your mortgage may vary significantly, and as a lawyer has to change the financing title, legal costs will need to be factored in. That said, if your mortgage balance is greater than $200,000, you might find that a broker and/or lender will cover this cost.
If you decide to break your mortgage mid-term, you will be charged a prepayment penalty from your lender, and if you have a fixed mortgage rate, this amounts to the greater of three months interest or the interest rate differential payment, or IRD. If you have a variable mortgage rate, you’ll simply be required to pay an amount equivalent to three months interest.
For the full lowdown on refinancing your mortgage, schedule a consultation with a licensed mortgage specialist, who will help you assess the pros and cons and guide you towards making the best decision for your individual circumstances.