Mortgage Refinancing ... The In's and Out's

Posted by Jeff Trounsell (jefftrounsell) on Sep 05 2012
Blog >> September 2012

Mortgage refinance

A mortgage doesn’t have to be a life sentence. Whether you’re interested in a lower rate, consolidating debt, or tapping into home equity, there may be good reasons for you to refinance. As of July 9th 2012, you can refinance up to 80% of your home’s value.


Reasons to refinance your mortgage


1. To take advantage of low interest rates

Don’t let penalties deter you; first, know the numbers. Breaking your contract for a lower interest rate can save you money over time, depending on the penalty and the size of your outstanding mortgage. If you hold a variable mortgage rate, then expect to pay a penalty of three months interest, and if you hold a fixed mortgage rate, then you will likely pay the greater of three months interest or interest rate differential penalty (IRD).


2. To access equity (cash) in your home

By refinancing, you can access up to 80% of your home's value less any current mortgages on your home. That’s extra money for investment opportunities, home renovations, or your children’s education. There are several ways to access this equity including breaking your mortgage, taking on a home equity line of credit or blending and extending your mortgage with your current lender.


3. To consolidate debt

If you have enough equity in your home, you will be able to pay-out high-interest debt through a refinance. For example, if you have a number of outstanding debts, such as a car loan, a line of credit, or credit card bills, you may be able to consolidate all of the debt through the variety of refinance options available.


Methods of refinancing your mortgage



There are several options available to you when considering a refinance which include: breaking your mortgage contract early, taking our a home equity line of credit or blending and extending your mortgage with your current lender.

1. Break your existing mortgage contract early

You would consider breaking your mortgage early if you wanted to obtain a lower interest rate or access equity from your home. In this case you eliminate your existing mortgage and take on a brand new one any lender.


2. Add a home equity line of credit

A home equity line of credit gives you access to the equity in your home at your own discretion. You are responsible for interest only payments each month on the outstanding balance. You can access a home equity line of credit through your existing lender and a small subset of other lenders.


3. Blend and extend your existing mortgage

Your existing mortgage lender may offer you a ‘blended rate’; essentially, a ‘blend’ of your current mortgage rate plus any additional money you borrow at current market rates. Blended rates are almost always higher than the most competitive mortgage rates on the market, so make sure you compare the blended rate against the savings if you break your mortgage.


Costs of refinancing your mortgage



The cost to refinance your mortgage depends on the strategy you use to access equity or lower your interest rate. No matter which strategy you use you will always incur legal costs as a laywer must change the financing on title. The good news is if your mortgage balance is greater than $200,000, many brokers and/or lenders will cover this cost.


If you are breaking your mortgage in the middle of your term to access equity or lower your interest rate your lender will charge you a mortgage breakage or prepayment penalty. For fixed mortgage rates this penalty is the greater of three months interest or the interest rate differential payment (IRD). For variable mortgage rates this is simply three months interest.

Last changed: Sep 04 2012 at 10:12 PM

Back to Blog