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Time to Refinance
There are many reasons why you might consider refinancing your mortgage. You might be looking for a shorter term, access to extra cash or a chance to take advantage of lower rates.
All of these are good reasons, but keep in mind that there are penalties when paying off a mortgage early. As a general rule, you shouldn't refinance your mortgage unless the new rate is two full percentage points lower than your current rate. Typically the two-point rule compensates for the hard costs associated with refinancing.
More Equity, Faster
Many people refinance to shorten the term of a mortgage. Often, first-time buyers are appropriately cautious and take out a long-term mortgage to ensure they can meet the monthly payments. By refinancing to a shorter term at a higher monthly payment, you can end up saving tens of thousands of dollars in interest over the years. Furthermore, you build up equity in your home much more quickly and, should you need it, you'll have all that additional equity to borrow against.
Refinancing for Capital
Another good reason to refinance is to gain access to some additional cash. This is an especially good option if you have outstanding debts at an interest rate that is higher than your new mortgage rate. By using the additional cash to pay off your other debts, you are effectively amalgamating your debt under one roof at one low rate.
Reducing Monthly Payments
Perhaps the best reason to refinance is to take advantage of lower rates that will reduce your monthly payments. After figuring all of the refinancing fees and penalties into the cost of your new mortgage, you might well be able to reduce your monthly payment by a couple of hundred dollars. That extra cash can go a long way toward other major purchases, or can add significantly to your RRSPs or other investments.