Refinancing a mortgage is a big step with the vast majority of homeowners citing lower interest rates and monthly mortgage payments as their reason for doing so. But there is more to the mortgage refinancing equation than that. There are a number of costs associated with refinancing, including the payback period. As a homeowner, you need to determine the payback period before refinancing; failing to do so could result in paying for refinancing that either prevents you from achieving meaningful savings or ends up costing you more in the long run.
What Is the “Payback Period” with Mortgage Refinancing?
The goal of refinancing a mortgage in Ontario is to ease your monthly financial payments. To achieve this goal, it is critical that property owners evaluate whether or not refinancing will actually benefit you financially.
Refinancing a mortgage with lower interest rates can save you thousands of dollars. Having lower monthly mortgage payments can also free up much needed cash. But there are upfront tradeoffs when refinancing.
For example, when you refinance a mortgage, you need to close your previous mortgage. This will result in a prepayment penalty. The newly refinanced mortgage will also come with closing costs and other fees. All of this adds up.
To see if it makes sense to refinance, or rather, to determine who you should refinance with, calculate how long the payback period is. What is the length of time it will take to recoup the costs associated of refinancing the mortgage?
When determining the payback period, many people simply divide the overall closing costs by the monthly savings. But there is more to truly figuring out the payback period than taking the difference between your payments before refinancing and after refinancing.
In some instances, even after refinancing, you could end up with the same monthly payment (or even pay more) and still come out ahead. Your private mortgage professional can help explain the process to you.
One thing is certain though, if the payback period is longer than the amortization period of the mortgage or the time it takes to sell the house, refinancing probably doesn’t make financial sense.
When Should You Consider Refinancing a Mortgage?
Again, the most popular reason for refinancing a mortgage is lower interest rates. More money goes to the principle and less goes to interest payments, meaning the mortgage gets paid off more quickly.
There are also other reasons for refinancing. Many people refinance their mortgage because they want to switch from a variable mortgage to a fixed rate mortgage. Case in point: mortgage rates are low, but the Bank of Canada has been raising its key lending rate and has signaled it will continue to. This means it is becoming more expensive to borrow. As a result, it’s a good time to refinance your mortgage with a fixed rate.
You might also want to consider refinancing a mortgage to vary the payback period. If you want to payback your mortgage over a longer period of time or even pay it off more quickly, consider refinancing your mortgage with different terms.
Factors Affecting the Payback Period
Below are a number of factors that could affect the payback period.
Your Financial Situation
Just because you have a mortgage and have never missed a payment does not mean you will qualify elsewhere for refinancing. Nor does it mean refinancing a mortgage will save you money. That’s because your current financial situation may have changed since you qualified for your initial mortgage. And it will all affect the payback period.
That’s why it’s important to reconsider factors like your credit history and debt load. If your credit history has taken a hit, if you’ve taken on additional debt, or if you’re job situation has changed for the worse, Canada’s big banks will not give you their best rates.
If the equity you’ve built up in the property when you decide to refinance is low, Canada’s big banks will hit you with higher interest rates. Chances are, this will negate any potential savings.
Refinancing a Mortgage Often
Refinancing a mortgage often is not a good idea and will actually erase any potential cost benefits. When you refinance a mortgage once, you are hit with fees on both ends: from the original lender and new lender.
When you refinance a mortgage more than once, your switching costs begin to accumulate, and chances are quite good you will end up spending more than you wanted to save.
Refinancing a mortgage numerous times will also negatively affect your credit score.
Canadalend.com, Helping You Secure a Second Mortgage
If you are thinking of refinancing a mortgage and want to know if it is a good time to do so and if it will benefit you financially, contact the licensed mortgage professionals at Canadalend.com. The experienced mortgagee consultants at Canadalend.com will weigh your options and determine what the payback period is and whether or not it fits your financial and lifestyle needs.
Why choose Canadalend.com over the big banks or other private lenders? The licensed mortgage professionals at Canadalend.com are independent. Traditional lenders will only try and sell you their own products, even if it’s not what you’re looking for.
Because the licensed mortgage professionals at Canadalend.com are independent, they are looking out for your best interest. They also have access to hundreds of different lenders. Many specialize in helping homeowners with bad or no credit or unreliable income refinance their mortgage.
To find out what your best equity option for retirement is, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.