Mortgage refinancing can be an effective strategy if you are looking to access equity in your home or if you are trying to lower your payments. But it is not the right strategy for everyone in all circumstances, so before you decide to refinance your mortgage, you need to understand exactly what that means and when you should do it.
What is Mortgage Refinancing?
In its simplest terms, mortgage refinancing is breaking your current mortgage and replacing it with another one. Your new mortgage could have the same principal as your current one if you are only looking to reduce your interest rate or it could be a higher principal if you wish to take some cash out of your home equity. Because you are breaking your current mortgage, there will most likely be a financial penalty.
When Should Your Refinance Your Mortgage?
Because there will be a financial penalty for breaking your current mortgage, you should make sure that any savings you get from refinancing are greater than the penalty you will have to pay. The closer you are to your renewal date, the lower your penalty will be. Your mortgage broker will have to run the calculations to see whether refinancing will save you money and how much it will save you.
In general however, there are certain circumstances where refinancing makes sense:
1. Lower Your Interest Rate
Even a small decrease in your mortgage interest rate can save you thousands of dollars and result in you paying off your mortgage years sooner. If interest rates have dropped recently – or if you previously had to accept a higher interest rate on your mortgage because of poor credit etc. – it may be time to refinance and save interest.
2. Consolidate High-Interest Debt
If you have sufficient equity in your home and you have high-interest debt (credit cards, payday loans, etc.) then refinancing cannot only significantly reduce your interest payments, but it might even lower your monthly debt payments as well.
3. Access Cash From Home Equity
The third common reason to refinance your mortgage is if you wish to access cash from your home equity. This cash might be used to pay for a home renovation, start a business, etc. It is still a form of credit, however it is a much less expense form than many others.
If you think that mortgage refinancing might be for you, we would be happy to help. Contact Akal Mortgages today for a consultation.
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