With prime rate near a record low, there’s never been a better time to refinance your mortgage. Even if you only bought your home a couple of years ago, you could find yourself with a lot of untapped equity due to rising home prices. Borrowing money from your mortgage is perhaps the cheapest form of debt out there. That’s because it has a rock-solid investment, your house, backing it. It’s a lot cheaper than an unsecured line of credit or your credit card. Although refinancing can save you money, it isn’t the right decision for everyone. A lot of people forget they’ll incur costs when refinancing. Here are three good reasons to consider refinancing your mortgage.
1. Take Advantage of Record-Low Interest Rates
When you’re a homeowner you can have your cake and eat it, too. Mortgage rates are low today, but they were higher just a couple of years ago. If you signed up for a mortgage at a higher rate, you may be wondering if you should refinance. For most people, their mortgage is their largest debt. Even shaving 0.5 percent off your mortgage rate can add up to thousands of dollars in savings over the life of your mortgage. Here’s how refinancing works: you pay off your existing mortgage and take out a new mortgage at a lower rate. If you have an open mortgage that’s no problem, but most Canadians don’t. If you have a closed mortgage, you’ll have to pay a mortgage penalty.
Before you decide to break the shackles of your mortgage, consider the cost you’ll incur. The mortgage penalty you’ll pay depends on the type of mortgage you have. If you have a variable rate mortgage it’s pretty straightforward – you’ll pay three months’ worth of interest charges. If you have a fixed-rate mortgage (the five-year is the most popular among first-time homebuyers), you’ll pay the greater of three months’ interest or the Interest Rate Differential. Make sure you crunch the numbers ahead of time to make sure you’ll truly end up saving money.
2. Consolidate Debt
Are you up to your ears in debt? If you’re carrying expensive credit card debt, it’s worth considering refinancing your mortgage. Under this option, your new mortgage pays off your outstanding debt and you start with a clean slate. When you refinance your mortgage, not only will you save on interest charges, you’ll only have one outstanding loan to worry about (instead of many).
3. Tap into Your Home’s Equity
Are you facing an expensive home renovation? Instead of putting it on your credit card, why not take out a Home Equity Line of Credit? With home values skyrocketing, there’s never been a better time to tap into your home’s equity. This option isn’t from everybody though. If you’re a first-time homebuyer and you haven’t built up very much equity in your house, you won’t be able to borrow very much. With a HELOC you can borrow 65 percent of your home’s equity at a rate as low as prime plus 0.5 percent.