When to Refinance a Home Mortgage
Refinancing a mortgage allows borrowers to replace a home loan with a new one, often with lower interest rates and terms. Other beneficial features include being able to consolidate all personal debt into one loan, pull out equity from the home, reduce monthly payments, and even switch to fixed rate terms.
Refinancing is a big decision for homeowners and not one to take lightly.
Factors to Consider When Refinancing
Perhaps the most important consideration is to first think about your long term goals and what you hope to achieve by refinancing your home. While lower interest rates may seem appealing, switching to a new loan can carry additional costs such as fees for discharging and registering the mortgage.
Total costs often vary depending on the lender but the additional fees can potentially take months or even years to recoup. Look beyond the interest rates and really think about the entire life of the loan. In other words, refinancing needs to be carefully considered and not just done on a whim.
If you plan to leave or sell your home, then refinancing may not be ideal and could even cost you more than you had anticipated. Another factor is the security of your income and your financial history as this is what lenders look at when assessing what refinancing terms you can qualify for.
Below is a summary of when to refinance a home mortgage and when it may be best to reconsider.
When to Refinance
- Your current interest rate is above others in the market
- You want to consolidate your debt into one payment
- A major financial shift occurred such as a job promotion
- You need access to a lump sum of cash for a potential investment or home renovations
- You want to change your loan to a fixed rate
- You need to lower your home loan monthly payment
When NOT to Refinance
- You have plans to move out of the property
- The costs of refinancing outweigh money saving benefits
- Your income is uncertain or you expect significant changes in your work
- You have a poor credit history or have records of non-payment
- You are not sure how refinancing helps your goals
Calculate Your Savings
Refinancing your home loan to a lower interest rate sounds appealing, especially if it means saving thousands of dollars. However, you first need to carefully review your long term financial goals to determine if refinancing is right for you.
Even with a lower interest rate, you could still end up paying more if you extend the length of the loan and once closing costs are taken into account. Total costs to refinance a mortgage vary from lender to lender.
If your primary objective is to save money from a lower interest rate or by shortening the term, it helps to look at how much you stand to save.
Use an Online Mortgage Calculator
One way to easily calculate how much you could save from a refinance is to use a mortgage calculator. All you need to do is input the mortgage amount, the term in years, and the interest rate. Adjusting the loan length and interest rate allows you to calculate what your new monthly payments will be like.
Let’s use an example.
The total amount you would pay on a $150,000 home loan at a 6% interest rate over 25 years would be about $289,935.
The same loan refinanced to 5% would be about $263,067, resulting in a savings of $26,868. Even after calculating closing costs and other fees, you would still be saving a significant amount. Refinancing in this situation makes sense and not doing so would cost you quite a bit of money.
However, the total cost of the same loan but changed to a 30 year term would cost about $289,882. The amount is nearly identical in the original example and you would actually be losing money in this situation once all the fees are taken into account.
You may not mind especially if it helps you manage your monthly expenses better but it’s also worth calculating. Comparing these savings allow you to see how refinancing helps you accomplish your long term financial goals.
Your circumstances may have changed which could mean that refinancing is a great opportunity to get better loan terms that fit your lifestyle. While it may make financial sense to do a home loan refinance, there are also times when it may not be in your best interest to do so.
For more details on when to refinance a mortgage or to get started, simply fill out the form on this page. One of our mortgage brokers will contact you within 24 hours, even on the weekends.