Should you refinance your mortgage?

In 2020, we all spent a lot of time at home, and this has given a lot of us time to reconsider our financial situations. With the hit that the economy has taken due to the spread of COVID 19, it is important now more than ever to reduce your debt and curb your spending. Save your money and spend it wisely, like with investments that will pay off in the future.

Many have already realized this, which is why the real estate market has been booming. More and more buyers are eager to put their money into something that will reap rewards down the road. We can see from the Halifax real estate market statistics, that buying Halifax real estate will do just that.

This past year, mortgage rates in the area, and all over North America have dipped. This is not only a great opportunity for first-time home buyers but also for current homeowners, as there is always the option to refinance your mortgage. 

So instead of paying more than you need on interest for your mortgage, why not evaluate whether you are in the position to refinance for a lower interest rate?

Refinancing your mortgage means that you are breaking your mortgage to start a new one. This can be done with your current lender or even a new one. Before you jump in, it’s good to note that breaking a mortgage comes with a financial penalty. Always make sure that the savings that occur with refinancing are greater than the penalty.

The decision to refinance is a very personal one and takes into account many different factors. Let's dig into the factors that if applicable to you, would mean that refinancing is a good option.

The most obvious reason homeowners refinance is due to lower interest rates. An example that Investopedia gives states that if you took out a mortgage of $300,000 with a 6% interest rate, and that rate now can drop to 4.5%, you could save approximately 280$ on monthly payments.

If you are planning to own your home for a while, then refinancing would be a good option. If you are not, you may not end up saving money as you will need to pay a financial penalty for breaking your mortgage.

Homeowners also chose to refinance to access equity. When you refinance, the lender will offer you a loan of 80% of the appraised value of your home, less the debt you currently owe. This can mean extra cash for you to use for other investments, to consolidate debt, or to put towards a downpayment on a second property. If you are doing this, your mortgage monthly payments will increase based on the amount that you borrow.

Another reason that homeowners refinance is to switch their adjustable-rate mortgage to a secure fixed-rate. You may want to do this if your lender is offering historically low rates and you wish to lock in that rate for the remainder of your mortgage. No homeowner ever wants to see drastic increases in their monthly payments due to a spike in mortgage rates. There is always the potential for this to occur when you are locked into an adjustable-rate mortgage.

Homeowners may also want to refinance if their credit score has improved since they took out their first loan. If your credit score was not great when you first applied for your mortgage, the lender may have added a higher interest rate. If your credit score has increased since then, lenders will assume that you can pay back your loan more reliably, and thus you are less of a risk for them to take on as a client. This can score you some seriously lower interest rates! 

f you are in a situation where you would like your monthly mortgage payments to be lower than they currently are, refinancing may be for you. If there is not a lower mortgage rate to achieve this, you can refinance for a longer-term. You should know, extending your loan only makes sense if you desperately need to make lower payments. This will not save you money in the long term, as you will end up paying more in interest, but may help ease the burden in the meantime.

Things to remember when shopping around for refinancing options...

It's important to approach a few different lenders when thinking about refinancing, as each lender will offer a different rate. Like any big purchase, you want to ensure you know all of your options to score the best deal.

It may seem easiest to simply go online and use a free estimate generator. You should know, these are rarely accurate. In this way, you also have no control over where your information goes. We recommend always approaching lenders directly so that your information is secure, and you get the most accurate estimates to evaluate. 

You can also reach out to a mortgage broker, who will do most of the heavy lifting for you. Mortgage brokers are professionals who will compile information for you from multiple lenders to provide you with your best options. We always recommend Shawna Snair with Premiere Mortgage Centre to our clients!

The bottom line is, refinancing ultimately depends on your unique situation. A good rule of thumb is that if you're savings from a lower interest rate or better credit score outweighs the costs that will come with refinancing, then it is a good idea look into it. 

Experts are predicting that mortgage rates may begin to rise again midway through 2021, meaning there is no time like the present to consider refinancing.

Rate Hub does a great job at summarizing the pros and cons of refinancing in the chart below:

Table Source: Rate Hub: Mortgage Refinance. 2020

If you wish to chat more about mortgage tips, reach out!

Cheers, 

Andrew

902-488-0012

andrew@andrewperkins.ca