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Is it a Good Time to Refinance your Mortgage?

Is it a Good Time to Refinance your Mortgage?
By Robb Engen

The Bank of Montreal made headlines last week, announcing a special 5-year fixed rate of 2.99 per cent.  Other banks  followed with their own special offers, as the competition for mortgages heats-up across the country.

This might be a good time to consider refinancing your mortgage.  Here’s why: 

When interest rates are low, many people refinance in order to save thousands of dollars over the life of their mortgage.  However, it’s important to determine what the pre-payment charge will be before refinancing your mortgage.

A pre-payment charge is the amount you will need to pay for breaking the terms initially negotiated on your mortgage.  This can be a large amount, meaning you won’t actually be saving money in the long run.

It doesn’t always make sense to break your mortgage, but a good rule of thumb is if interest rates are at least 0.5 per cent lower than your current mortgage rate, it’s worth looking at refinancing.

Consider a scenario where you locked-in at a discounted 5-year fixed mortgage rate of 3.99 percent in January, 2010.  The balance on your mortgage is $250,000.

Even though variable rates are lower, you’re still concerned about rising interest rates in the future.  Your bank is now offering a 5-year fixed rate of 3.49 per cent.  

In order to break your current mortgage after two years of payments, and with three years remaining on your term, you will be charged an interest rate differential (IRD) penalty of $3,750*.

The penalty sounds pretty stiff, and that’s what scares people and prevents them from taking action.  By refinancing with the new interest rate of 3.49 per cent for the remaining 36 months, you will save $128 per month in mortgage payments, and save more than $6,775 in interest.

As consumers, we spend a lot of time shopping around for the best grocery prices, or looking for the cheapest gas station, yet we can’t be bothered to review our mortgage at least once a year for the opportunity to save thousands of dollars.

Before refinancing, consider how long you plan to stay in your home, how you plan to use any extra cash flow, and how refinancing can support your overall financial goals.

* contact your lender directly for an exact penalty quote