One of our Mobile Mortgage Specialists, Rebecca Fox, gets asked this question a lot: “Could I save money by refinancing my mortgage?” And her answer is always more complex than a simple yes or no. Read Rebecca’s first-hand account with Peter, a member who’s considering refinancing, to learn more.
Article contributed by Rebecca Fox, Mobile Mortgage Specialist at Interior Savings.
When I bumped into Peter in line at our favourite coffee shop one morning, he said he’d been watching interest rates fall for a while and asked me if he could save money by refinancing his mortgage at a new, lower rate. I think he was hoping for a definitive answer while we were waiting for the milk to steam. But I explained it wasn’t that simple, so we scheduled a meeting for later, in a more private setting than the java line.
Refinancing your mortgage at a lower rate doesn’t always save you money.
And that’s what I met with Peter about to explain in more detail.
Calculate the Costs to Refinance
There are costs associated with breaking one mortgage and acquiring a new one. When you get out of a mortgage before your term is up (most commonly 3, 5 or 7 years), you usually have to pay a penalty. And then setting up a new mortgage involves additional costs: registration fees, title transfer charges, solicitor and legal costs.
I explained to Peter that the costs to refinance his mortgage could be around $3000. Even if a new rate saved him $150/month, it would be almost two years before he benefitted from any savings. In Peter’s case, he’d need to stay put for a while to make refinancing pay off.
Look at the Life of Your Mortgage
Peter was calculating monthly savings without looking at the life of his mortgage. He was already 5 years into his prior mortgage, but planned to replace it with a new 30-year mortgage. Instead of making mortgage payments for the next 25 years, he’d be making them for the next 30.
And in some cases, a lower rate does not mean paying less interest. For example, if Peter finances a new $300,000 mortgage for 30 years at 2.9%, he’ll pay $148,525 in interest before he pays off his home. Keeping his current $300,000 mortgage for the remaining 25 years at his higher rate of 3.25%, he’ll pay $137,550 in interest over the life of his mortgage. So, Peter would actually end up paying $11,000 more with the lower rate.
Really, the only way to reduce interest on your mortgage is to pay it off sooner. Or is it?
Consider Our Blend and Extend Option
I introduced Peter to our Interior Savings Blend and Extend option. Blend and Extend allows our members to renegotiate their rate without paying a penalty. A flat fee covers the transfer – there’s no need to pay for legal, registration or title processes. We could start a new 5-year term for Peter at a blend of the original rate and a new rate. His amortization schedule wouldn’t change and Peter would immediately get the benefits of a lower rate, without all the fees.
We also discussed the advantages of renegotiating his mortgage now that he had more than 20% equity in his home and could eliminate his CMHC payment requirement. Peter’s credit rating was steadily strengthening and I was looking forward to offering him a favourable rate if he chose to Blend and Extend his Interior Savings mortgage.
Meet with a Mortgage Specialist More Often
These days, mortgages are more ‘program’ than ‘product’ and are designed to be flexible to accommodate members’ borrowing needs. Always take the time you need with your mortgage provider to crunch the numbers, look at your options, share your goals and work out the right solution for you.
Want to find out more about renewing or refinancing your mortgage? Chat with a Mobile Mortgage Specialist.