Refinancing a mortgage means replacing your existing mortgage with a new one that’s more favourable with terms and rates. Ultimately, refinancing can allow a borrower to save money on interest with a newer mortgage. Whether you should refinance depends on how much money you will save by doing so. You may estimate your potential savings by taking a look at interest rates, closing fees, and the length of time you want to stay in your home.

Benefits of Refinancing

The benefits you gain from refinancing vary from person to person and are based on individual needs, goals, and financial situation. Although, refinancing often brings borrowers positive benefits by saving time and money. Here are some of the most common benefits you can expect to earn from refinancing.

Lower Interest Rate

The main reason to refinance is to lock in a lower interest rate. Often, when rates fall, refinancing rates pick up. Refinancing your home at a cheaper rate could result in thousands of dollars in term savings, depending on the length of your loan and how long you want to live there. 

However, if your credit has improved, there’s no need to wait for rates to decrease. On the basis of having a higher credit score, you may occasionally be able to refinance at a lower rate.

Lower Payments

Lower interest rates can further result in lower monthly payments, but you can also reduce your payments by stretching the term of your loan when you refinance the loan on your home, giving you extra money each month for other obligations. 

In that case, you would also be making fewer payments each month towards the principal, which would result in greater costs throughout the course of the loan. To determine what makes sense, you’ll need to run the figures depending on your own circumstances. Before you make a choice, a trusted mortgage broker can walk you through the different scenarios so you are aware of all your possibilities.

Shorten Term Length

You can change the term length of your mortgage to help save additional money. You’ll be able to pay off the loan faster and at a much lower interest rate. The downside with a shorter mortgage term is higher monthly payments, but the difference may be minimal depending on the size of your loan and interest rate.

Easier to Budget

If you originally had an adjustable-rate mortgage (ARM), you might choose to lock in a more predictable lower fixed rate. With this payment method, the effect that interest rate increases may have on monthly payments is mitigated and it will be much easier to budget month to month.

Borrow Money

You can refinance to use the equity built up in your home and borrow money towards renovations, education or other major expenses. This money can be used for anything and the money you take out will be included with the principal of the refinancing amount. This may be a more cost-effective method as opposed to a personal loan or line of credit, depending on your situation.

What To Know Before Refinancing

Determining if you should refinance requires consideration of several factors. Your goals, needs, and financial situation will dictate what options are open to you. Here are key components to know that will impact your refinancing decision.

• The higher home equity you have, the better it is
• Higher credit scores can give you lower interest rates
• Debt to income ratio – how much debt you have compared to income
• Current interest rates and term options
• Fees, expenses, costs, and taxes associated with refinancing
• Do you require private mortgage insurance?

Conclusion

To help you through the process, the Mills Team has years of experience with mortgage refinancing in Ottawa to help our clients best understand their options and get the best rates and terms for their individual needs.