Should You Refinance Your Home

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There are many reasons that people like you choose to refinance their home. Interest rates may have fallen, your credit rating has improved, you want to combine a first and second mortgage, you need lower monthly payments, you want the same mortgage payment every month, you’re retired and want to enjoy more out of life, or you may just need cash. Here are some of the pros and cons about refinancing your house.

You want to lower your interest rate. If interest rates have dropped or if you’ve improved your credit rating, refinancing means lower monthly payments, and may also let you build equity in your home more quickly. This is a good choice!

You need a lower monthly payment. If want to pay less each month, you need to lengthen your term. But bear in mind, it’ll not only take longer to pay your mortgage off, you’ll end up paying more interest in the long run.

You want pay off your mortgage faster. A shorter term offers lower interest rates and reduces your total interest costs. While it does save money in the long run, it will cost you more per month.

You want a set monthly payment. With an adjustable rate mortgage, if interest rates are climbing or about to climb, your monthly payments will increase along with them. Switching to a fixed rate mortgage not only gives peace of mind, but allows you to budget more effectively.

You want only one mortgage payment per month. Combining a first and second mortgage makes your financial life simpler. Whether or not you can do this, though, depends on your credit score, how much equity you have in your home, how big your second mortgage is, and how long it’s been since you got that second mortgage.

You need cash. With ‘cash-out’ refinancing your loan is greater than what you owe on your home. You receive the difference in a cash payment. It’s great to finance a child’s education or home improvements. It may not the best choice if you want to pay off a mound of credit card debt or expensive vehicle loans (check out a home equity loan or home equity line of credit instead). No matter what your need is, bear in mind that when you take the cash you lose equity. And it takes time to build that equity back up again. 

You’d like more money to enjoy your retirement. Home owners 62 years or older can get a reverse mortgage. You make no more monthly payments. You access built up equity and defer payment of the mortgage until you sell, move out, or die. The monthly interest is added to the loan balance. However, if home values drop, or you stay in the home for a long time, the loan may become greater than the home’s value. It’s against the law in Canada, for the loan balance to be greater than the fair market value of the house, so you may face penalties.

While these are all good reasons to refinance your home, there are times when it’s better for you not to refinance. 

Close to the end of your mortgage more of your payments apply to the principal and help build equity. If you refinance in the later years of your mortgage you restart the amortization process, and most of your monthly payment goes to paying interest again and not to building equity.

If your current mortgage has a prepayment penalty, you may not be gaining as much through refinancing as you think. Carefully balance the prepayment costs against the savings you expect to gain.


If you plan to move in the next few years, figure out if the savings gained from lower monthly payments will exceed the costs of refinancing. Do a detailed ‘break-even’ calculation to determine whether refinancing is really worthwhile.

As you have seen, there are many reasons why – and why not – to refinance your home. Whatever your reason is, you should be just as meticulous and careful as when you negotiated your first mortgage. Be vigilant and do thorough research. Talk to your current lender first, they may give you more leeway than other lenders in order to keep your business. And make sure to take the time necessary to make the best decision for you!

 

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