When Should I Refinance My Mortgage? | Rocket Mortgage Canada (2024)

Deciding whether to refinance your mortgage doesn’t need to be stressful or complicated. The pandemic has created a low interest rate environment that’s currently offering a unique opportunity for qualifying homeowners to reduce their monthly costs by refinancing their mortgage. But how do you know if refinancing is the right decision for you? Learn more about the refinancing process and what benefits it could provide so you can better determine if it’s a good fit for your personal situation.

What Does Refinancing Your Mortgage Mean?

The process of refinancing your mortgage involves paying off your existing mortgage with a new one. Homeowners pursue this option to take advantage of low interest rates consolidate their debt, gain access to the equity they’ve built up in their homes or to change their mortgage type.

As long as you have at least 20% equity built up in your home, you can qualify for refinancing. If done properly, this process can save you thousands of dollars over the life of your mortgage and could shave years off your amortization period with a larger portion of your payments going toward the principal thanks to lower interest rates.

Mortgage Refinancing Benefits

Regardless of why you’re refinancing, there are a few main benefits you can reap by making the decision to pursue this option:

Lower Monthly Payment

Since the pandemic began, interest rates have dropped to historically low levels. This means if you choose to refinance, you’ll likely lower your interest rate which means you’ll pay less interest over the life of your mortgage and lower your monthly mortgage payments as a result. Confirm your current interest rate and compare it to others being offered so you can calculate the amount of cash you’ll save every month. It’s likely this number will get your attention as even a rate change of 1% can translate into $150 – $200 per month saved (in some cases).

Pay Less Interest Over Course Of Loan

Choosing to refinance can help you seek out more stability with a lower interest rate you can lock in for up to 5 years. In the midst of a global pandemic, this can be a big benefit that can take the pressure off your finances in the short term and give you access to more cash should an emergency arise or if you find yourself in need of more money to maintain your current lifestyle amidst uncertainty.

Home Equity

One of the biggest benefits to refinancing your mortgage is getting access to the equity you’ve built up in your home over the years. You can calculate how much equity you’ve built up by taking the total value of your home and subtracting your mortgage balance. Whether you’re looking to use this equity to complete home renovations, pay off high interest debt, invest in post-secondary education or purchase an investment property, this can be a game-changer for some homeowners who are in need of a large amount of cash.

Mortgage Refinancing Downsides

Where there are pros, there are inevitably cons, and it’s important to understand what you’ll encounter as part of the refinancing process that may be less than ideal.

Prepayment Penalties

Refinancing your mortgage entails breaking your current mortgage term, which always comes with penalties in the form of fees you won’t be able to avoid. Be sure to call your lender and ask about these fees before you pursue a refinance so you have a better idea of how much cash it’ll cost you to do so. Sometimes prepayment penalties can be quite significant ranging from a few thousand dollars to tens of thousands of dollars so knowing this information in advance is essential to knowing if pursuing the savings you’ll receive through refinancing is worth the cost you’ll incur up front.

Refinancing Costs

Not only will you incur prepayment penalties, you’ll also be on the hook for other costs associated with your choice to refinance and you’ll need to determine if your savings outweigh these costs. You can expect to pay a mortgage discharge fee (typically $200 – $350) to get out of your current mortgage, then a mortgage registration fee (typically $70) to register your new one again and any legal fees you may incur as part of that process (likely between $700 – $1,000). While none of these numbers are very daunting, they will need to be paid up front so it’s important to ensure you have the extra cash available to get these fees taken care of before you get access to your equity.

Getting Qualified

It’s important to remember that refinancing involves applying for a whole new mortgage which means you’ll need to prove you can afford your monthly payments. This means the lender will be looking at your credit score and debt-to-income ratio all over again to be sure you can afford the new mortgage. If you’ve found yourself in a not-so-ideal financial situation through the course of the pandemic (unemployment, taken on new debt, missed payments, etc.), then refinancing may not be the best option for you.

When Should I Consider Refinancing?

There are certain situations that may make refinancing a more favourable option based on your immediate needs and your personal qualification criteria. Typically refinancing involves a cost-to-benefit analysis to determine if the expenses associated with refinancing will be outweighed by the benefits it’ll bring along with it.

Lower Mortgage Rates Are Available

Some people may pursue refinancing strictly to save on mortgage rates if they’re currently at historical lows. If you notice the market rates are significantly lower than what you’re currently paying, you should consider comparing your current lender’s offerings against what else is available on the market to make sure you’re getting the best deal possible for your personal situation.

You’re Trying To Consolidate Or Pay Off Debt

If you’re currently managing and working to pay off high-interest debt, the benefits of a refinance can be spectacular, as long as you’re able to manage the higher mortgage amount over time. Refinancing brings with it the benefit of much lower interest rates so you can unlock the equity you’ve built up in your home and use it to pay off your debt at a much lower interest rate which could save you tens of thousands of dollars over the life of your mortgage.

You Want To Renovate Your Home

More often than not, homeowners tend to have lofty renovation goals but are missing the budget they need to execute it to their taste/preference. Renovating major hubs like the kitchen or bathrooms in a home can wind up costing a whole lot more money than you think, but that doesn’t mean these projects aren’t possible. Unlocking the equity in your home to fund home improvements can help you build your ideal home without worrying about paying off high interest loans, and even add on extra value when it comes time to sell.

You’re Exploring Investment Opportunities

If you’ve always wanted to invest in more real estate and are interested in exploring the purchase of a second home, income property, etc., refinancing your mortgage could give you access to the funds you need to pursue this new venture without juggling multiple high interest loans.

COVID-19 has led to some very unique economic conditions with some of the lowest mortgage rates on record. If you’ve managed to maintain your employment, retain a steady income and keep up with your bills, refinancing your mortgage could offer you some serious benefits. Whether it’s securing a lower interest rate, unlocking home equity for big ticket projects or finally consolidating and paying off your debt, there are plenty of reasons to consider refinancing. Understanding the process, what you’ll need to qualify and how to determine if the benefits outweigh the costs is a great place to start. If you’re looking to learn more about mortgage refinancing, contact our team of mortgage brokers to get started.