Should you refinance early in order to take advantage of low rates?
Are you thinking about refinancing your mortgage? Early refinancing has become a bit of a trend; not surprisingly though, everyone is looking to save money where they can. Obtaining a new loan with better interest rates for your home could mean saving money on monthly low mortgage rate payments, or using the extra money on other projects such as renovations or making investments.
Does Everyone Benefit from Refinancing?
The decision to break an existing mortgage should not be taken lightly. Regardless of what the benefits look like on the surface, there are penalties associated with refinancing; penalties that could leave less change in your pocket than you had expected.
34 percent of those who recently renewed or renegotiated their best Canadian mortgage rate did so before their term expired. The average time to pay off a mortgage is 7.4 years less than the original amortization. (Source: CAAMP)
Do Your Research and Speak to a Low Mortgage Rate Specialist
If now isn’t the time to refinance, keep in mind that mortgage brokers can review your best mortgage rate at any time, so it is always possible to do something about your mortgage when you are ready. Ask your broker to conduct a mortgage analysis to determine if renewing your loan at a lower rate is worth it.
Find Out What Your Penalties Are
Until recently, the main penalty you would ever have to pay was three month's interest. If you have a fixed rate, financial institutions now also look at the Interest Rate Differential (IRD) and will charge the higher of the two.
Determine If It’s Worth It
Penalties can get costly, but that doesn’t mean it’s not worth looking into. In order to keep your business, financial institutions can take 15% off the balance of your mortgage to calculate the penalty, rather than using the full amount, resulting in a lower overall penalty fee.
In some cases, banks will offer a blended rate for the remainder of your mortgage period. Your penalty will depend on your lender and how well you can negotiate.
It combines your present mortgage at its existing rate with any additional money you borrow at the current rates. Doing this allows you to take advantage of existing lower rates without having to pay a penalty. However, some banks may use the posted rate, rather than the lower rates to calculate your new blended rate.
What You Need to Qualify
In order to qualify for refinancing you must have at least 10% equity in your home. You and your mortgage advisor can determine if long term savings outweigh the penalty.