With interest rates on mortgages being as low as they've ever been, the question of when you should refinance your home might be swirling around in your head. Refinancing your mortgage is a bit of a process. There are obviously unfortunately situations in which you may need to consider refinancing, but there can also be optimal moments where it makes sense to do this for a variety of reasons. Let's look at what refinancing a mortgage is and when it might a good time to consider doing it.
Note: Mortgage renewals are similar but not quite the same as refinancing. You can read more about that here.
Why Would You Consider Refinancing Your Mortgage?
Simply put, refinancing your mortgage means paying off an existing loan on your house and replacing that loan with a new one. This new loan will come with a new term, new amortization if you wish, new interest rates and the like.
As mentioned, there are some unfortunate reasons why you may need to refinance your mortgage. These situations may include a sudden change in steady income because of job loss or some sort of other financial stressor that changes your ability to make regular mortgage payments.
Aside from these situations, there are other more fortunate reasons for you to consider refinancing your mortgage. Perhaps you are noticing lower interest rates compared to what you are currently paying or maybe you want to flip from a fixed-rate mortgage to a variable rate mortgage. Perhaps you want to tap into the equity you've built up in your home for investing reasons or maybe you want to tackle a renovation that would further increase the value of your home.
These are all good reasons to consider refinancing. The important thing is to do your homework, take a look at the numbers and evaluate whether this is the right move for you.
Getting Started With Refinancing Your Mortgage
As you are looking at your current mortgage and whether it's an appropriate time to refinance, one of the first things you will want to be aware of is the cost of getting out of your current mortgage. Depending on where you are at in your current term, it can cost anywhere from 3-6% of what you have left owing on the principal of your mortgage.
Refinancing also requires an appraisal of what your home is currently valued at, a title search as well as application fees for the refinance process. Additionally, refinancing your mortgage requires a hard credit check which can affect your credit score in the long run.
As much as possible, you will want to be sure refinancing is a strong possibility for you before you do the work of getting an appraisal and going ahead with the application process.
Taking Advantage Of Lower Interest Rates
One of the most common reasons for refinancing your mortgage is to take advantage of lower interest rates. Lenders these days are suggesting that an interest rate drop in as little as 1% is enough of an incentive to consider refinancing.
A lower interest rate on your mortgage can improve your cash flow situation by stretching out the term to a new 25 to 30 year length making your monthly payment notably lower. On the flip side, refinancing can also be a way to decrease the overall term of your mortgage if you are willing to keep your mortgage payments the same and direct more of those payments toward the principal amount owing.
Both of these options can be a major win depending on your situation and what your goals are.
Taking Advantage of Equity Through Refinancing
One of the other common reasons for refinancing your mortgage is to tap into the equity within your home. The equity in your home can be used for a variety of things including home renovations, further investing strategies or even financing education expenses for your children.
Borrowing money against the equity of your home is by far cheaper than financing home renovations by credit card and likely cheaper than other lines of credit too. Using equity from your home for investment purposes like The Smith Manoeuvre or other investing strategies can be a great way to get ahead financially too.
At the same time, granting yourself access to a large amount of credit can be quite a slippery slope. It's important to keep in mind that this is still borrowed money that must be repaid. Refinancing for the purposes of leveraging home equity requires wisdom and discipline.
Is Refinancing Your Mortgage Right For You?
The answer to most difficult questions is, "it depends" and the answer is no different when it comes to refinancing your mortgage. We've noted that the upfront cost of refinancing can be substantial. Additionally, it takes a fair amount of time to recoup this cost. Refinancing requires a degree of stability, predictability and a long term commitment to your situation and your goals.
Before you take any steps toward refinancing, it's best to consult a mortgage specialist or financial advisor to assess your situation and see what might be best for you. If you feel like this might be something you'd like to consider, we would be happy to provide any amount of consultation and guide you through the process.