When and how to refinance your mortgage

November 27, 2014

Everyone wants to save money and get their property paid off ASAP. But can refinancing a mortgage really help do that?

When and how to refinance your mortgage

What is refinancing?

It can - if you're savvy about how you do it. Let's start with a basic definition.

  • Refinancing is when you pay off an existing debt with a new loan. So you're replacing one debt with another.
  • There are a lot of good reasons to refinance, as well as times when you want to avoid it.

When should you refinance? What are the benefits of refinancing? Let's take a look.

Getting a lower interest rate

There are many benefits to securing a lower interest rate by refinancing your mortgage.

  • The most obvious is saving money.
  • Also, your equity can build faster and that can decrease the monthly payments themselves.
  • Over time, the benefits of a lower interest rate can add up to a big difference.
  • Depending on your situation and who you ask, a rate reduction of 1-2 per cent can be enough to justify the refinancing. Anything more than that is almost certainly worth it.

Changing between fixed rate and adjustable rate

The obvious risk of an adjustable rate is that, while the starting interest rate can be lower, it might go up enough over time to offset the savings.

  • In some cases, when interest rates are rising over the long term trend, converting to a fixed rate can save you money.
  • On the other hand, if you have a fixed rate and interests rates are steadily dropping over the long term, it can actually be a good choice to convert to an adjustable rate.

It's a tricky balance to strike, but when done properly, the payoff can be considerable.

Getting a shorter loan term

Getting a shorter term on your mortgage obviously decreases the amount of time before the property is fully paid off.

  • In many cases, if a lower interest rate can be achieved, instead of saving the money each month and putting it to other uses, you can keep the monthly payments the same and shorten the total repayment time.
  • Your finances and budget remain the same, but your equity will build faster.

Cashing in on home equity or consolidating

It's possible to refinance your mortgage to pay for large one-off expenditures like renovations, or to consolidate other higher-interest debt into your mortgage.

It can seem like a sound strategy, and can indeed be worth it in some cases, but the risks are real.

  • Any refinancing to access your equity will increase the total amount of time it will take you to pay off your debt.
  • Repeated refinancing in this manner can lead to an unending cycle of debt. Be cautious when considering your options.
  • Your number one objective should usually be to pay off your mortgage as quickly and affordably as you possibly can.
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