People refinance their mortgages for a number of different reasons, and it can be a great way to help with your financial goals. Whether it is to consolidate debt, get a better interest rate, or take out equity from your home, knowing when to refinance is an important step in the process.
Good timing for refinancing:
When Interest Rates Are Low
In today’s low rate environment, refinancing when rates are low simply makes good sense. Breaking your current mortgage to take advantage of a lower rate can potentially help you save thousands of dollars.
When Your Home Has Increased In Value
Although the Canadian housing market has been estimated to cool in 2017, most home owners have seen the value of their homes increase every year for the last decade or so. By refinancing, you can access up to 80% of the value of your home, minus any current mortgages. If your home has increased in value and you have been paying down an existing mortgage, you likely have equity available to refinance.
When Your Break Penalty Is Low Enough
By breaking your existing mortgage early, your bank will charge you a break penalty. The amount of your break penalty will vary depending on your rate, mortgage amount, and the terms of your contract. Typically break penalties are the IRD (interest rate differential) or three month’s interest. A mortgage broker should be able to help you calculate your break penalty, and find out if breaking the mortgage makes good financial sense.
Knowing When To Refinance Also Depends On Knowing What To Do With The Money
Good reasons to refinance include: paying for renovations, buying investment properties, other investment opportunities, consolidating existing debt, or to help pay for children’s education. If you are carrying debt that is at a higher interest rate than your mortgage such as car loans, credit cards or lines of credit, refinancing would likely make sense.