When Should You Refinance Your Mortgage?
Refinancing your mortgage can save you thousands of dollars or provide access to your home equity—but it's not always the right move. Understanding when and why to refinance can help you make a smart financial decision. Here's everything you need to know.
Top 5 Reasons to Refinance
1. To Get a Lower Interest Rate
If rates have dropped significantly since you got your mortgage, refinancing could save you thousands.
Rule of Thumb: Refinancing usually makes sense if you can reduce your rate by at least 0.5-1%.
2. To Access Home Equity
Tap into your home's equity for renovations, debt consolidation, or other major expenses. You can typically borrow up to 80% of your home's value.
Best For: Home improvements that increase property value, consolidating high-interest debt.
3. To Shorten Your Amortization
Pay off your mortgage faster by refinancing to a shorter term. Higher payments but significant interest savings.
Example: Moving from 25 years to 15 years could save you $100,000+ in interest.
4. To Consolidate Debt
Roll high-interest debt (credit cards, car loans) into your mortgage at a much lower rate.
Caution: Only works if you address the spending habits that created the debt.
5. To Switch from Variable to Fixed (or Vice Versa)
Change your rate type to better align with your risk tolerance or market outlook.
Popular Move: Locking in a fixed rate when variable rates are rising.
The True Cost of Refinancing
Before you refinance, understand ALL the costs involved:
Prepayment Penalty (The Big One)
Fixed Rate Mortgages: Greater of 3 months' interest OR Interest Rate Differential (IRD). IRD can be $10,000-$30,000+
Variable Rate Mortgages: Usually just 3 months' interest (typically $2,000-$5,000)
💡 Tip: Wait until your term is up to avoid this penalty!
Other Refinancing Costs
- • Appraisal fee: $300-$500
- • Legal fees: $500-$1,500
- • Title insurance: $200-$400
- • Discharge fee: $200-$350
- • Administration fees: $100-$300
Total: $1,300-$3,050
When to Refinance at Renewal
At the end of your term (renewal time), you can switch lenders with NO prepayment penalty!
This is the ideal time to shop around and potentially switch lenders for a better rate.
Break-Even Analysis: Will You Save Money?
Use this formula to calculate your break-even point:
Break-Even Formula:
Total Refinancing Costs ÷ Monthly Savings = Months to Break Even
Example:
• Total costs (including penalty): $15,000
• Monthly savings from lower rate: $250
• Break-even: 60 months (5 years)
✓ Worth it if you'll stay 5+ years
When NOT to Refinance
- You're planning to move soon - Won't recoup costs
- The rate difference is minimal - Less than 0.5% usually isn't worth it
- Your credit score has dropped - You may not qualify for better rates
- You're near the end of your term - Just wait for renewal (no penalty!)
- Breaking costs are prohibitive - IRD penalty exceeds potential savings
Get a Free Refinancing Analysis
A mortgage broker can calculate your exact break-even point, compare current rates, and determine if refinancing makes financial sense for you. Best of all, this analysis is completely free!