Refinance Mortgage When It Makes Sense
In Canada, the interest rates for new mortgages has never been better going into 2010, so you’d think that the refinance mortgage process designed to secure lower rates would also be most appropriate at this time.
While this could very well be the case, current interest rates are not the only elements that can dictate the ideal time to refinance.
The reality of the refinancing process is that it should only be undertaken if there is a positive economic benefit in doing so. And just because current interest rates are at record low levels doesn’t guarantee such a benefit.
Situations where the refinance mortgage process does likely make a lot of sense is when the mortgage holder currently is working with a floating rate or has a fixed term rate that is near maturity. In these situations, the borrower is able to avoid or minimize the most expensive aspect of mortgage refinancing and that’s a prepayment penalty incurred from paying out the existing mortgage by the newly created mortgage.
On the flip side, mortgages with fixed term interest rates where substantial time is left on the fixed interest period can make the process of refinancing completely uneconomical. That being said, a significant prepayment penalty does not automatically mean that there is no ability to save money through the refinance process.
The calculation to determine the related economic benefit needs to includes the costs of refinancing as well as the cost savings generated by a new mortgage over the time of the chosen interest term. If the overall math works out, then a refinance process would make sense to complete. If the math doesn’t provide a positive result, then other scenarios should likely be considered.
Fixed interest rates can be considerable based on the way they are calculated. Lenders are required to lock in their sources of funds prior to extending a fix interest rate offering. So if a borrower pays out a fixed term mortgage before completion of the term, the penalty serves to cover the cost and profit the lender would have received if the mortgage went to term.
Most residential mortgage prepayment penalties are the higher of 3 months interest penalty or interest differential, which calculates the difference between the existing fixed term mortgage rate and the lenders posted interest rate for the same period of time. This is why the prepayment penalty, in many cases, can eliminate most or all of the benefit of the refinance mortgage process.
The key to determining what makes the most sense for a given situation is to work through your options with a mortgage broker. To that point, I would recommend that give me a call so that we can work through your options together and determine your best course of action.
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About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel