Refinance And Debt Consolidation
If you have an existing mortgage, you may at some point consider refinancing it. In practice, this means replacing your current loan with a new one at different interest rate.
Homeowners choose to refinance their mortgage for a few reasons, including:
- Taking advantage of a lower interest rate—If interest rates fall, refinancing can allow you to lower your interest payments.
- Tapping the equity in their home—Refinancing a mortgage can permit you to access up to 80% of your home’s value (less any outstanding mortgages).
- To consolidate their debts—Assuming you have sufficient equity in your home, refinancing your mortgage can allow you to combine other debts (such as credit card debt and auto loans) into one at a more favourable interest rate.
How to refinance your mortgage
There are a few ways to refinance a mortgage, such as:
- Take out a home equity line of credit (HELOC)—A HELOC allows you to access the equity in your home and use it to renovate your home, buy an investment property, or for whatever you want. You only have to make interest payments on the amount you withdraw.
- Break your mortgage contract—You may decide to break your mortgage contract if you can get a lower interest rate from another lender. It only makes sense to break your mortgage if the penalty to break your mortgage doesn’t exceed your potential savings by getting a lower rate.
- Blended mortgage—A blended mortgage occurs when you want to access equity in your home, get a lower mortgage rate, or both. Your rate will be in between your current mortgage rate and your new rate. While you won’t have to pay a prepayment penalty, you won’t get the best rate either.
The costs of refinancing
Before refinancing a mortgage, it’s important to check that it makes financial sense. For example, you may be able to obtain a lower interest rate from another lender, but after paying the prepayment penalty, it may not be worth it. If you have a fixed-rate mortgage, the prepayment penalty is three months of interest or what’s known as the interest rate differential payment, whichever is greater. If you have a variable-rate mortgage, the prepayment penalty is simply three months’ interest.
Finally, keep in mind that you typically have to pay a lawyer if you’re refinancing your mortgage (although if the mortgage is greater than $200,000 the financial institution may cover this cost. Before going ahead with refinancing, this is something else you need to be aware of.