If you have a mortgage and you’d like to capitalize on lower interest rates, take advantage of the equity in your home or consolidate your debts, you may want to consider refinancing your home. This will allow you to replace your current mortgage with a new one at a different interest rate.
Reasons to Refinance
Common motivations for refinancing your home include:
- You want to renovate your home.
- You want to invest in a new property.
- You’re thinking about entering a business venture but don’t have the capital to proceed.
- You’d like to consolidate your debts.
- Interest rates have dropped so refinancing your home can actually lower your borrowing costs.
It’s important to be 100% sure you’re incurring a good debt and refinancing for the right reasons.
How to Refinance
Here are the most popular ways for you to refinance your home:
- You could take out a home equity line of credit (HELOC): This gives you access to up to 80% of the current equity in your home, and you only have to make interest payments on your new loan, rather than interest and principal.
- You could break your mortgage contract: This only makes sense if the savings outweigh the penalty.
- You could get a blended mortgage: Your rate will fall somewhere between your old and new rates, and you won’t have to pay a prepayment penalty.
Costs of Refinancing
Earlier we mentioned refinancing your mortgage for the right reasons. Fixed-rate mortgages typically require a prepayment penalty of three months’ interest or interest for the remainder of the term on the prepaid amount calculated using the interest rate differential, whichever is greatest. If your mortgage is variable-rate, the prepayment penalty is typically three months’ interest.