Lower Interest Rates
While there are penalties in place for breaking a mortgage contract, however if the interest rate is lower, this can save you money over time. Of course you must also look at the penalty and the size of the outstanding mortgage.
If you have enough equity in your home, you will be able to pay out high-interest debt through a refinance. An example of this is if you have a number of outstanding debt (car loans, line of credit, credit cards) you may be able to consolidate all of the debt through a variety of refinance options.
Access equity in your home
By accessing equity in your home, you can access up to 80% of your home’s value minus any outstanding mortgages. There are several ways to access this equity, we will examine the three main ways below.
Methods to refinance
Blend and extend your existing mortgage
There is a chance that your existing mortgage lender may offer you a “blended rate”; this is essentially a blend of your current mortgage rate plus any money you borrow at current market rates. These rates are normally higher than most competitive mortgage rates, so make sure to compare the blended rate against the savings.
Add a home equity line of credit
This home equity line of credit gives you access to the equity in your home at your own discretion. You are responsible for interest only payments each month on the outstanding balance. This can be done through your existing lender or a small subset of other lenders.
Break your existing mortgage contract
Breaking your mortgage contract is something you might consider, if you want to take advantage of lower interest rates or access equity from your home. This will eliminate your existing mortgage contract and allow you to take on a new mortgage with a new lender.
Cost of Refinancing
The cost of refinancing your mortgage all depends on which strategy you use. No matter what strategy you choose, you will always incur legal fees, as a lawyer must change the financing on the title.
If you are breaking the mortgage in the middle of the term, your lender will charge a prepayment penalty. For variable mortgage rates this is simply three months interest. For fixed mortgage rates this penalty is the greater of three months interest or the interest rate differential payment (IRD).