Should I Consider Refinancing My Home?
Other than an even stronger dip in 2010, interest rates are at their lowest point in over 70 years. If you locked into a mortgage before 2009, you might be paying 5-6% when everyone else is paying less than 3%.
Find the best mortgage rates with our fixed (https://www.mortgagerates.ca/mortgage-rates/fixed) and variable (https://www.mortgagerates.ca/mortgage-rates/variable) rate calculators.
You might be feeling that you’re losing out and decide that refinancing is the only option.
How Do I Know If I Should Refinance?
Refinancing can be a complicated process, and there’s more to it than just comparing interest rates. If you shop around and find you can save 2% compared to your current mortgage, you still have to factor in all the different angles.
Remaining Balance – The interest rate will be largely affected by how much you still owe on your home. If you still owe $400,000, then a 2% difference will be huge. If you’re almost finished paying off your home, 2% of the balance might not make a huge difference and won’t be justified by the other fees.
Closing Costs – Refinancing is a lot like buying your house from yourself – you have to pay closing costs just like you did when you bought it the first time. Depending on how much you still owe and when you plan to sell the home, the closing costs could completely cancel out the savings from the lower interest rate.
Some banks will offer you the ability to roll the closing costs into your mortgage payments. This sounds great because you might get the interest rate savings and only have to pay an extra few bucks a month, but in reality you’re going to be paying interest on those closing costs for years!
Shorter Term – Your financial situation may have changed since you purchased the home, and refinancing is a great way to set everything up to pay off your home faster. If you’re on a 20 year term right now, maybe you can refinance on a 15 or even 10 year term. You don’t have to think of the lower mortgage rates as a way to save money – you can also think of it as a way to pay everything down more aggressively. Lowering the term with a lower rate could help you own your home much sooner.
Fixed vs. Variable Rates – While you’re refinancing, you might also think about switching from a fixed to a variable rate or vice-versa. Always consider how much time you have left on your mortgage, and, as much as you or anyone else can, make an educated guess as to which way rates are going to go. Locking into a low fixed rate is great in the short-term, but could leave you stuck paying a higher-than necessary rate when the term is up.
Calculating Your Break-even Point
Luckily, your refinancing question comes largely down to math. Your first step is figuring out what all of the costs of refinancing are. Once you have that number, simply figure out how long it will take for the savings from your new lower rate to pay off that amount.
For example, if the costs involved in refinancing are $2,000, and your monthly savings are going to be $110 per month, it will take 18 months to break even.
If you’re going to live in your home for more than the year and a half, it’s looking like a good plan to refinance.
Always ask a lot of questions and read the details of any refinancing policy to make sure there are no hidden charges.