Timing the Refinancing of a Mortgage: Key Considerations

Refinancing a mortgage can be a powerful tool for homeowners seeking to lower monthly payments, access home equity, or adjust the loan terms to better suit their financial goals. But deciding when to refinance—and whether it’s the right choice—requires careful consideration. Here are some key considerations to keep in mind.

What is Mortgage Refinancing?

Mortgage refinancing happens when an existing mortgage is replaced with a new one, typically with new terms and a different interest rate. Refinancing can also allow homeowners to access the equity in their property by increasing the new mortgage amount for things like debt consolidation, renovations or education. The process involves paying off the current mortgage lender with either a new mortgage from the same lender or a different lender entirely. While refinancing can offer significant financial benefits, it may include additional costs such as appraisal fees, legal fees and even penalties if the mortgage is paid out early. 

Interest Rates

Interest rates play a pivotal role in refinancing decisions. When market rates fall, refinancing might make financial sense, especially if rates lower by 1% or more. Keep in mind, however, since market conditions fluctuate rapidly, waiting on the perfect rate may not always be productive. 

Home Equity

For many homeowners, refinancing is an opportunity to access the equity built up in a property, often for renovations, consolidating high-interest debt, or funding educational pursuits. Home equity is calculated by subtracting the current mortgage balance from the home’s market value. Lenders prefer to see at least 20% equity before considering approving a refinance, so keeping track of the home’s equity can be helpful in planning a refinancing timeline.

Long-Term Financial Goals

Ideally, refinancing should support longer-term financial objectives such as paying off the mortgage faster, lowering monthly payments or paying down debt. Those looking to pay off their mortgage sooner may prefer to switch from a 25 or 30-year term to a 15-year term. This will raise monthly payments but may allow homeowners to be mortgage-free faster. Alternatively, those looking for monthly payment relief may want to consider lowering their monthly mortgage payments by refinancing at a lower interest rate and/or a longer term. 

Credit Scores

The credit scores of the homeowner(s) significantly impact the interest rate offered by lenders. Higher credit scores can lead to better rates, while low credit scores will often prove harder to approve or more costly. When considering a refinance, homeowners are encouraged to understand what their credit scores and credit reports look like. Speaking with a mortgage broker can help alleviate any concerns in this regard prior to starting the refinancing process. 

Evaluating when to refinance a mortgage requires assessing interest rates, financial goals, home equity, and credit health. Homeowners in Saskatchewan can benefit from speaking with a mortgage professional to explore options and receive guidance on whether refinancing aligns with their long-term financial plans. Consulting with a mortgage expert can provide clarity and confidence in making a well-timed, informed refinancing decision.