MoneySense Toolkit: The mortgage refinance calculator

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Depending on your circumstances, refinancing your mortgage can be a smart financial choice. However, while you can reap substantial savings, there can also be high costs when refinancing a mortgage. That’s where a mortgage refinance calculator comes in. It can give you a better overall picture of the financial pros and cons of refinancing and make it much easier to figure out the right choice for your needs.

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What is a mortgage refinance?

Refinancing your mortgage is when you renegotiate the terms of your current mortgage loan contract. You can refinance a mortgage agreement with your current lender or go to a new mortgage lender, and doing so at the end of your mortgage term may help you avoid paying prepayment penalties. 

Why use a mortgage refinance calculator?

Deciding whether or not to refinance your mortgage can be overwhelming, because there are many variables to consider. Before you break a mortgage agreement, you want to be  aware of all the financial ramifications—both what you might save and what it might cost you. A mortgage refinance calculator can help you understand the financial impacts of refinancing. It takes care of all the calculations so you don’t have to. 

Of course, every person’s situation is unique. Though a mortgage refinance calculator is a helpful tool, it’s always good to speak to an expert or mortgage broker before making a final decision. 

When to consider a mortgage refinance

There are two main reasons you may want to break your current mortgage contract and refinance. 

The first is to take advantage of lower interest rates and thus lower the cost of your mortgage. Taking advantage of reduced interest rates can potentially save you tens of thousands of dollars over the course of your mortgage. A lower rate can also allow you to enjoy lower monthly payments, making your mortgage much easier to manage over the long term. Even a slight reduction in your mortgage interest rate can add up to big savings and may be worth any prepayment penalties you may be subject to (more on that below).

The second reason is to access the equity in your home. As you make payments on your mortgage, you steadily build up equity in your property. Your home equity is the difference between the current market value of your house and how much you still owe on your mortgage. Once you’ve built up sufficient equity, lenders may let you borrow up to 80% of the appraised value of your home, minus the remaining balance on your mortgage. 

Depending on your lender, you may also be able to refinance through a second mortgage, a Home Equity Line of Credit (HELOC) or a loan or line of credit secured with your home. It’s worth noting that because you are using your home’s value to secure the loan, you may also get access to better interest rates. 

Be aware of prepayment penalties

However, just as there are good reasons to refinance a mortgage, there are also reasons to stick with your current mortgage. One of the main reasons people decide not to refinance is the high cost of prepayment penalties, which lenders charge when you break a mortgage contract early. 

Fixed-rate mortgage holders typically pay the higher of three months interest on their remaining mortgage balance or the interest rate differential, a penalty based on the difference between your current mortgage rate and the rate the lender would use if lending the funds today. Variable-rate mortgage holders are penalized three months interest. (Note that penalties may vary based on the financial institution, original mortgage contract, term length and more.)

It’s important to get a full picture of what refinancing your mortgage will cost you, which means factoring in things like prepayment penalties,legal, appraisal and administration fees, as well as title search and insurance fees. 

Before you decide to refinance your mortgage, you need to carefully consider whether the financial penalties outweigh any savings you would enjoy. A mortgage refinance calculator can be an indispensable tool when it comes to deciding whether or not to refinance, because it shows you not only how much you could save, but also how much you could potentially owe in penalties.

You’re 2 minutes away from getting the best mortgage rates in CanadaAnswer a few quick questions to get a personalized rate quote

I’m buying a homeI’m renewing/refinancing

You will be leaving MoneySense. Just close the tab to return.

Other mortgage calculators:

  • Mortgage affordability calculator
  • Mortgage payment calculator
  • Mortgage down payment calculator
  • Land transfer tax calculator
  • CMHC mortgage insurance calculator
  • Mortgage renewal calculator

The post MoneySense Toolkit: The mortgage refinance calculator appeared first on MoneySense.

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