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When do You Have to Refinance Your Mortgage?

If you’re an owner, you’ve probably heard about mortgage refinancing, but do you really understand what that means? A refinance involves breaking your existing mortgage contract in order to get a new mortgage.

Before refinancing your mortgage, it is better to calculate how much it will cost you, to avoid finding yourself with penalty fees and unexpected legal fees once you are already engaged in the process.

Although the initial cost may seem high, a number of reasons drives an owner to choose to refinance his mortgage. Let’s analyze some of the most common reasons:


To enjoy a better mortgage rate

To enjoy a better mortgage rate

If your initial mortgage rate is much higher than today’s rates, it may be helpful to refinance your mortgage to take advantage of the best rates available on the market. However, it is important to understand the penalties involved:

  • If you have a variable rate, you will simply have to pay 3 months of interest.
  • If you have a fixed rate, you will pay the higher amount between the three-month penalty and the IRD penalty.

As long as the penalties are not too high, and your new mortgage rate gives you substantial savings in the long run, refinancing to be a great strategy.


To enjoy the equity of your home

If you want to renovate your home, buy a second home, or you simply need liquidity and want to access some of the equity in your home, refinancing to take advantage of the money out of your home is a Another reason many homeowners choose to refinance their mortgage. You can borrow up to 80% of the value of your home (less what you owe), through refinancing. For example, if your property is valued at $ 400,000 and you still owe $ 250,000, you multiply the $ 400,000 by 0.80 and then subtract the $ 250,000 to get $ 70,000 – this is the amount of $ 400,000. money you can get from your home.

If you want to avoid having to pay a mortgage penalty, you can also access 65-80% of your capital through a Home Line of Credit (HELOC) instead.


To consolidate and repay the debt

Since mortgage rates are currently at historically low levels, the consolidation and repayment of high interest debt is another reason why many homeowners choose to refinance their mortgage. If you pay off a credit card or loan at a high interest rate, refinancing can help you consolidate all of the debt back into your home for a fraction of the interest rate. This option can help you reduce the amount of the monthly debt repayment.


To shorten or lengthen your amortization period

If you find yourself in a financial stalemate, refinancing can offer you some financial flexibility. If you have lost your job or become sick, refinancing your mortgage will allow you to extend the amortization period and lower your mortgage payments. On the other hand, if you want to pay off your mortgage faster, you can refinance your mortgage to increase the amount of your payments and shorten your amortization period – in addition, in this case, you may have access to certain privileges through the prepayment options outlined in your mortgage agreement.


To lock in your mortgage

Does the prospect of your variable rate suddenly start to hurt you? If you own a home with a variable rate and a tight budget, you might consider refinancing your mortgage to lock it into a fixed rate. This is a good idea, especially if you think that interest rates will increase in the near future, and that you do not have the budget to make a larger payment than the one you already make.

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