A few tips on how to proceed with refinancing options.
As we find ourselves amidst relatively high interest rates, borrowers might be surprised to find variable rates sitting at higher levels than fixed rates. It's easy to get enticed by the prospect of trimming your expenses or shortening your mortgage term through early refinancing, as more and more people are paying a higher percentage of interest than they were last year.
Before you take the plunge and refinance your mortgage, let's explore a few pointers to help you navigate the process without any unwelcome surprises.
Seek out a mortgage expert.
Choosing a mortgage broker is no small feat. Here are a few things to mull over:
- How seasoned is this mortgage broker in the industry?
- Does this broker have a knack for refinancing?
- Is this a full-time or part-time mortgage broker?
- Is the broker an independent operator or employed by a lender?
- What professional designations or educational background does this broker possess?
Pinpoint your refinancing motivation.
Aside from securing a better rate, consider other motives for refinancing your mortgage.
- Are you looking to consolidate unsecured debt?
- Do you wish to extract some money for investment purposes?
- Are you dissatisfied with your current lender?
- By identifying your reasons for refinancing, you'll be better equipped to evaluate your options.
Contemplate your short-term and long-term home goals.
Before diving into refinancing, take a moment to ponder your objectives for your present home. If you plan to sell and purchase a new home soon, you might consider holding off on refinancing until you secure your new property. This way, you'll save yourself time and effort by applying for a new mortgage just once (when buying your new home) rather than twice (refinancing and then buying your new home).
Assess the refinancing penalty.
This is often the most significant hurdle. With a fixed-rate mortgage, you're contractually obligated to maintain your mortgage until it's up for renewal. Consequently, refinancing before maturity incurs a penalty. This penalty may be reduced or even waived if the refinance is conducted with the same lender (some lenders offer early renewal options).
Payout penalties typically hinge on the greater of two figures: 1) 3 months' interest, or 2) Interest Rate Differential (IRD).
The IRD is a widely misunderstood term in the mortgage industry. A major bank's website describes it as follows:
"The IRD amount is equivalent to the difference between your annual interest rate and the posted interest rate on a mortgage that is closest to the remainder of the term less any rate discount you received, multiplied by the amount being prepaid, and multiplied by the time that is remaining on the term."
Confused yet?
A comprehensive explanation of the IRD process is beyond the scope of this article. However, it's important to be aware of the tactics banks employ to inflate penalties. Here's an insightful article on the subject.
Note: Some "no-frills" mortgages don't permit refinancing. If you have such a mortgage, review the terms and conditions.
Crunch the numbers on refinancing costs.
Once you've determined the penalty amount and the current market rate you're eligible for, you can evaluate the merits of refinancing. At this stage, rely on your mortgage broker to examine the figures and provide recommendations.
Even if the penalty for refinancing outweighs the savings from a lower rate, refinancing may still be worth considering for the following reasons:
You're consolidating high-interest consumer debt (credit cards, personal loans, etc.), resulting in a lower overall borrowing cost after refinancing.
You're concerned about rising interest rates, so refinancing to a longer-term mortgage might save you money in the long run if rates increase in the future.
In some instances, refinancing a mortgage can result in thousands of dollars in savings. Given the current low interest rates, it's certainly worthwhile to consult an independent mortgage broker to determine if refinancing is a sensible move for you.
