There are a lot of misconceptions about refinancing your mortgage…that it’s only for people who get into financial problems, that you’ll pay a BIG penalty to break your existing mortgage, that it will end up taking longer to pay it off and these are just a few examples.
The reality is that refinancing your mortgage is part of an overall financial plan to manage your debt in the smartest way possible in an effort to minimize the interest you pay and increase your wealth. I like to refer to it as actively managing your mortgage. Interest rates are at historic lows, if you’re locked into even a moderately higher rate, it might make sense to consider breaking your existing mortgage in favour of a lower rate. If you’re carrying high interest debt through unsecured lines of credit or credit cards, it might also make sense. We all have the best of intentions when we buy things on credit, “I’ll just make payments every month for the next year and it will be paid off”. Unfortunately, those good intentions are often not exercised and in most cases the debt continues to grow instead of shrink. Instead of losing the battle with those good intentions, it would make sense to consolidate that debt into your mortgage so that you do begin to pay it down and slash your interest charges. If you’ve been thinking about renovating a kitchen or finishing your basement, why not take advantage of today’s low rates to access some of your home’s equity to finance those renovations and increase its value.
Yes, in most cases there will be a penalty to break your mortgage, sometimes even a few thousand dollars and you will incur legal costs. However, if the savings is greater than the penalty, doesn’t it make sense to refinance? I have a client right now who is considering refinancing and although the penalty is a few thousand dollars, I’ve estimated the savings at five times that much. The penalty and legal costs are incorporated into your new mortgage so there is no immediate cash coming out of your pocket. I know what you’re thinking, “but if I’m just refinancing to take advantage of lower rates, I now have a bigger mortgage that will take me longer to pay off”. Wrong. Even though your monthly payments will be lower, so is your interest rate, therefore more of your monthly payment will be going towards your principal effectively negating the amount that was added to your mortgage. Also, a prudent move would be to take the amount you’re saving in mortgage payments and make lump payments to your principal further cutting the amount of interest you’ll pay over time and the length of your mortgage.
I don’t think managing your mortgage should be any different than your investment portfolio. I don’t know anybody who invests their money and then just sits back and checks up on it every five years or so. If you’re invested in a mutual fund or a stock that is not performing, you sell it and buy something that is. Constantly churning your portfolio in search of higher returns. Your mortgage should be handled the same way…constantly looking for ways to pay less in interest charges in order to increase your wealth and decrease your debt load.
You may not think you can benefit from refinancing, but maybe you can…greatly. Isn’t worth getting a professional to look at it with no obligation or cost to let you know if indeed you can be saving thousands of dollars? Take a look at your current mortgage rate or your high interest credit card rates with balances you’ve carried for more than a year. I have access to variable rates starting at 1.85% and a 5-Yr fixed rate of 3.64% just to give you a few examples. Likely the gap between the rates you’re paying and the above rates could be staggering and you could be saving a bundle.
If you’re interested in a free, no obligation evaluation, let me know. I’d love to help you save some money. It’s time to start actively managing your mortgage rather than sitting back and paying too much in interest.
peter@theabbatangelogroup.com
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