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Many clients have questions surrounding refinancing: what exactly does it all entail? When is it a good time to refinance? What are the benefits and the downsides to it?

We often hear about people refinancing their home for various reasons. Many will fall within a few different categories:

  • Wanting to reduce payment amounts
  • Gaining access to more equity
  • Getting a lower interest rate

At the end of the day, what makes the decision to refinance difficult for some people is that needs to be made on an individual basis. It factors in lifestyle goals, current interest rates, long-term market outlook, current home and family needs, and more, making it a highly personal decision.

What we can address here is some of the overall basics of refinancing – what it is, benefits and drawbacks, and things you can factor into your decision.

What exactly is refinancing?

At its most basic definition, refinancing your home or mortgage means paying off your existing home loan and replacing it with a new one. (Investopedia)

What are the benefits?

Refinancing offers various benefits to the homeowner.

Access Equity: You can access your home’s equity, and put it towards other things. Oftentimes, this takes the form of home renovations, or accomplishing other life goals such as travel, education, or other large purchases.

Better Interest Rate: Many choose refinance when the interest rates are favourable. Refinancing when the interest rates are low can really benefit you and lower your monthly payments, even if it’s only by one percent. Talk to your local lending institution about current interest rates if you’re considering refinancing. They have the tools and market knowledge to help you make an informed decision.

Buy Income Property: Refinancing is a way for homeowners to leverage their property and buy an income property, helping increase your overall real estate worth.

Reduce Time: Refinancing can also help reduce the amount of time you’ll be paying off your loan, which is always a great thing!

When is it a good time to consider refinancing?

Again, this is determined on a personal level. You have to evaluate your current situation, financial goals, and the current interest rates. Oftentimes, big life changes can be a motivator to refinance, such as paying for your child’s education or a change in your income level. It could also be a good idea if you’re looking to remodel your home, which will add to your home’s overall value.

A common reason to refinance is to switch from a variable rate to a fixed interest rate. Fixed interest rates give you peace of mind because it will not fluctuate according to market conditions. With a variable rate, you can normally achieve a lower initial interest rate, but will have to factor in possible rises in this rate. For many, a good interest rate and peace of mind is reason enough to switch to a fixed rate, whereas homeowners looking to only stay in their home for a few years may opt for a variable interest rate and not worry about what their interest rate will be years down the road. You will have to consider your personal situation in this case – could you afford a 2% jump in interest on your current income? Many will mitigate this problem by paying more each month than the minimum requirement, which helps you be already adjusted to a jump in interest should it occur. (Which Mortgage)

What are some of the drawbacks to refinancing?

Refinancing is sometimes a step to accumulating more debt while appearing to lessen it. In particular, if you’re increasing the amount of time you’ll be paying your loan, you are simply extending your loan and debt, which can be a difficult spiral to get out of. While refinancing may initially provide more equity you will want to consider carefully where this equity is being invested and if it will help you achieve your goals and continue to pay off your mortgage.

Because it’s a decision that needs to be made on a personal, case by case basis, talking to your accountant or financial advisor at your local credited lending institution is the best first step you can take when considering whether or not to refinance your home. They can assist you by assessing your personal situation, goals, home value, current interest rates, and help you make the best decision!

 

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