Understanding Refinancing
Refinancing your mortgage means replacing your existing mortgage with a new one, typically with different terms. People refinance for all sorts of reasons: to get a lower interest rate, to access equity in their home, to consolidate debt, or to change their mortgage structure.
Common Reasons to Refinance
Getting a Lower Interest Rate
This is the classic reason to refinance. A general rule of thumb is that refinancing makes sense if you can reduce your rate by at least 0.5% to 1.0%, and you’ll be staying in the home long enough to recoup the costs.
Consolidating High-Interest Debt
If you have significant credit card debt or other high-interest debt, rolling that debt into your mortgage can dramatically reduce your interest costs. Credit cards typically charge 18% to 22% interest. Mortgage rates are currently in the 4% to 6% range.
Accessing Home Equity
Over time, as you pay down your mortgage and your home appreciates in value, you build equity. Refinancing lets you access some of that equity as cash. You can typically borrow up to 80% of your home’s current value.
Understanding the Costs of Refinancing
Prepayment Penalties
If you refinance before your current mortgage term ends, you’ll likely face a prepayment penalty. For variable rate mortgages, this is usually three months’ interest. For fixed rate mortgages, it’s typically the higher of three months’ interest or the Interest Rate Differential (IRD).
Other Costs
- Legal fees: $800 to $1,500
- Appraisal fees: $300 to $500
- Discharge fees: $200 to $350
Calculating Your Break-Even Point
The key to deciding whether refinancing makes sense is calculating your break-even point. For example, if your total refinancing costs are $7,900 and you’ll save $250 per month in interest costs:
$7,900 ÷ $250 = 31.6 months (about 2.5 years)
If you’re confident you’ll stay in the home for at least that long, refinancing makes financial sense.
When Refinancing Probably Doesn’t Make Sense
- You’re moving soon: The costs won’t be recouped in time
- The penalty is too high: Sometimes it doesn’t make sense even if rates have dropped
- You’re close to the end of your term: Wait until renewal instead
Get a Free Refinance Analysis
We offer free refinance analyses for Oakville homeowners. We’ll get your current payout information, run the numbers on your potential new mortgage, and show you exactly whether refinancing makes sense.
Call us at 416-822-7357 or fill out our online form to request your free analysis.