As a trusted Lethbridge mortgage professional serving Lethbridge and the surrounding areas, I am frequently asked by clients whether they should refinance their current mortgage. People typically ask this question because they have heard that they can lower their monthly payments or that mortgage rates have fallen and they’d like to take advantage of the lower rates available.
While these are valid reasons for wanting to refinance, there is a bit more to this decision than just paying less money per month.
First, let’s take a quick look at what refinancing is. When someone refinances, they are essentially paying off their current loan and swapping it for a brand new one. While it can be extremely beneficial to refinance your mortgage, there are usually some costs involved and doing so can also work against you. This is why it is important to talk to a mortgage professional who will help you determine if it makes sense to refinance.
Here are three of the main reasons that you SHOULD refinance your mortgage.
Locking in a lower interest rate
This is the most obvious reason, and it’s also the most common reason people refinance a mortgage. The general rule is that if you can save just 1% by refinancing, then it’s a no-brainer to do it. Doing so can help save you money and boost the rate that you build equity in your home. I have seen examples where as little as .5% of a difference still equals better long-term standing through a refinance.
You can pay a lower monthly amount by switching your mortgage when there is a lower interest rate available, or you can keep your mortgage payment the same as you are currently paying and rapidly advance the timeline of which your mortgage is paid off.
Consolidating Higher Interest Debt
Another common reason that people choose to refinance is to pay off current high-interest debt by using money built up through equity in their home. Although this may seem like a great idea in the beginning, this reason for refinancing should be carefully planned out with your mortgage broker & financial planner (if necessary).
For example, a good time to refinance to consolidate debt would be when you are certain that once your debts are paid off, you’ll be able to keep them that way. It can hurt you in the long run if you pay off debts via a refinance only to have the debts reappear. It’s quite tempting to start spending again once you see you are clear of debt, so be aware! Deflecting the additional cash streams that you were once paying towards debt into your mortgage or better still, into a diversified investment (TFSA or RRSP) could compound your savings / net worth position dramatically! That’s where your financial planner comes in. I work with a great Lethbridge Financial
Deflecting the additional cash streams that you were once paying towards debt into your mortgage or better still, into a diversified investment (TFSA or RRSP) could compound your savings / net worth position dramatically! That’s where your financial planner comes in. I work with a great Lethbridge Financial planner team that I’m always confident in referring if clients don’t already have someone managing their savings.
Changing from Adjustable-Rate to Fixed-Rate and Vice Versa
If you first set-up your mortgage under a fixed-rate, you may now be open to switching to an adjustable (variable) rate mortgage as it could save you considerable money over time.
Each option has its own benefits and drawbacks. It depends on what type of person you are and the financial situation you see yourself in both presently and over the term of your mortgage. I actually run into many people who are quick to dismiss adjustable mortgages because they don’t fully understand how powerful they actually are and how much money can be saved long term. (These mortgages aren’t nearly as risky as most people think).* This is where advice and planning from your mortgage broker can help you determine what is best suited to your specific situation.
By carefully considering why you want to refinance and talking it over with your mortgage broker, the opportunity is there to drastically save money / improve a family’s financial position down the line.
If refinancing is something that you think you may be interested in, contact a Lethbridge mortgage professional like myself and learn everything there is to know about refinancing!
*Here’s a link to a blog that I published in regards to the Variable vs Fixed mortgage debate – http://bit.ly/VariablevsFixed