Wednesday, October 19, 2011

When it’s worth refinancing your mortgage


Many homeowners wished they had asked more questions when they took out their mortgage. They assume there’s nothing they can do until the mortgage matures. Not so. A mortgage professional can review your mortgage at any time and offer tips on how to save you money.
Typically, we think of a fixed-term mortgage as a non-negotiable contract. And, it’s true that there are financial penalties to re-negotiate. Many homeowners ask mortgage professionals for a mortgage analysis – a detailed look at the penalties versus the payoffs to determine whether it’s worth refinancing to get a lower rate, finance a renovation or roll other debt into the new mortgage. Like many Canadian homeowners, you may find that refinancing makes sense.
There are two approaches to refinancing: you can simply pay out the penalty on your existing mortgage and start fresh with a new mortgage or you can opt for what is termed a “blend and extend.”
Firstly, understand that you won’t reap immediate rewards when you refinance; it will take time to see the savings, since you’ll have some up-front penalties.
So if you’re going to be selling your home in the next year, you’re unlikely to benefit from refinancing now. Your mortgage professional can help you assess your “payback” period: the length of time required to see any savings, based on the penalties you will incur and the difference between your existing rate and your new one.
Speaking of penalties, what does it cost to get out of your existing mortgage? Generally, you can expect to pay out the greater of either a) three months’ interest, or b) the interest-rate differential.* The interest rate differential can be high; in effect, your mortgage lender will expect you to pay them the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates. If you are early in your mortgage arrangement, the penalties may be high, so you should check with your mortgage professional. Don’t be put off by what looks like a big penalty: it’s only one factor in your analysis.
So is it worth it? Only your mortgage professional can tell you for sure, but many homeowners experience significant savings – even with rate differentials of two points (or possibly more). Also factor in whether you can roll other high-interest debt into your new mortgage, slashing your overall interest costs. It’s also important to consider whether your long-term goals become more attainable.
Start with a visit to a mortgage professional, who has access to rate information from a broad selection of lending institutions – and who can provide you with the kind of detailed analysis you’ll need to assess your options.

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