Over the past two or three years a large number of home owners were scrambling to lock-in their mortgages before interest rates went shooting up.  Since then mortgage rates have remained at extremely low levels, which is causing people to second guess their decision.

There are a few reasons why you might want to refinance your mortgage.  You can take advantage of lower interest rates, consolidate higher interest debt, or use your home equity for renovations, or large purchases.

Refinance Mortgage: Take Advantage of Low Rates

When interest rates are low, many people refinance to take advantage of the savings this can mean over the life of their mortgage.  But there is an important point to keep in mind before you refinance your mortgage.

Will you have to pay a mortgage pre-payment charge?  A pre-payment charge is what you will have to pay for breaking the terms initially negotiated on your mortgage.  This can be a large amount, which means you won’t really be saving money in the long run.

Refinance Mortgage: How Much Can You Save?

How much interest can you save if you refinance your mortgage?  A good rule of thumb when considering a refinance is if interest rates are at least 0.5% lower than your current mortgage rate.

Let’s take a look at a scenario where you locked-in with a 5 year fixed mortgage rate of 3.99% back in 2009.  You know that the variable rate is lower but you are still concerned about rising interest rates.  The best 5 year fixed mortgage rate out there today is at 3.49%.  The balance on your mortgage is $250,000.

To break your current mortgage after 2 years of payments and with 3 years remaining you would be charged an interest rate differential (IRD) penalty of $3,750.  The penalty sounds pretty stiff and that’s what scares a lot of people and prevents them from taking action.

If you refinance your mortgage with the new interest rate of 3.49% for the remaining 36 months, you will save $128 in mortgage payments each month and save over $6,775 in interest.

Refinance Mortgage: A Good Idea?

It amazes me how people can spend so much time shopping around to compare grocery store prices but can’t be bothered to refinance their mortgage, which is the single most expensive debt that most people will every incur in their lives.

Don’t neglect your mortgage for the next five years by spending thousands of dollars more in interest than you should.  I would recommend that you shop and compare mortgage rates at least once a year to ensure you are getting the best deal possible.


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