A mortgage refinance is when you break your current mortgage and start a new one, either with the same or a new lender. You might refinance your mortgage to get a lower rate, access equity in your home, or consolidate your debts. Breaking your mortgage early usually will incur prepayment penalty, so consult a mortgage specialist before doing so.
Reasons to refinance your mortgage
1. Getting a lower interest rate
Refinancing to get a lower interest rate can save you a lot of money over time, depending on the prepayment penalty and the size of your outstanding mortgage. If you hold a variable rate mortgage, then expect to pay a penalty of three months interest, and if you hold a fixed rate mortgage, then you will pay the greater of three months interest or interest rate differential penalty (IRD). Sometimes it would still a better option to refinance your mortgage and save some money even with the penalty paid..
2. Getting some cash out in your home
By refinancing your mortgage, you may be able to access the equity in your home, which means get some cash out from it. You could potentially access up to 80% of your home’s value, less any outstanding debt. 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 (a HELOC), or blending and extending your mortgage with your current lender.
3. Refinancing to consolidate debts with higher interest rates
This is the most money saving way for refinancing, you can save hundreds of dollars each month. If you have enough equity in your home, you might be able to use built-up equity in your home to pay-out high-interest debt through a mortgage 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 this debt through the variety of mortgage refinance options available.