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Is refinancing a good idea?

Marjo Johne
Media Planet
September 2010

Question:  Are you ready for a big purchase, but unsure how to allocate your funds?

Answer:  Crunch your numbers first to determine your payment strategy.

Maybe you're in the market for a new car or finally ready to redo your tired-looking kitchen. Or perhaps you want to take everything you owe and combine them into a single debt. Is it a good idea to refinance your mortgage to pay for these expenses?

Next to cash, breaking your existing mortgage and then taking out a bigger one is generally the cheapest way to finance big expenditures, say the mortgage and money experts. Mortgages tend to have lower interest rates than credit cards, bank loans and credit lines. And payments can be spread out over a longer period.

But before rushing out to speak to your bank or mortgage broker, it's important to crunch the numbers and know all the facts, say the experts.

"Many financial institutions charge a penalty for breaking a mortgage, particularly if you're refinancing with another bank," says Meaghan Hutchings, a Toronto-based mortgage agent with The Mortgage Coach, part of the Invis network of mortgage brokers. "So you have to consider all the costs-including the penalty amount, your existing mortgage rate, appraisal fees and lawyer fees - and figure out if the cost savings from a lower interest rate will actually offset these costs."

While refinancing your mortgage to consolidate multiple high-interest is a good strategy, it requires commitment and discipline, says Anjel Van Damme, director, home equity financing products at RBC.

It's important to be disciplined about not racking up debt again and to be commited to paying it down," she says.

For those with only a few thousand dollars in debt, consolidation may not be the best route to take, says Van Damme.

"Sometimes there are costs to refinancing or adding on to the mortgage," she says. "If you're only going to be saving a little, then maybe it's better to just be aggressive about paying off your credit card debt."

Given today's relatively low interest rates, many Canadian with fixed-rate mortgages are also looking at moving their mortgage to another bank as a way of reducing their housing costs. CIBC is responding to this increasingly popular refinancing strategy with its Mortgage Switch offer, which gives customers cash back on their new CIBC mortgage.

The cash, which is paid out up-front, helps mitigate any prepayment charges of breakage costs that may be charged by the current lender.

"Our message is that you don't need to wait until your mortgage is up for renewal to get advice about your options," says Colette Delaney, senior vice president, mortgages and lending at CIBC. "You can talk to an advisor today to review options that could help you reduce the interest you pay on your mortgage."

Whatever your reason for wanting to refinance your mortgage, the experts say it's a good idea to talk to your banker or mortgage professional before making a final decision.

"The bottom line result for this decision should be for you to better off in the short and long term," says Hutchings at The Mortgage Coach. "If the savings on lower interest rates are not going to outweigh the penalty and other related costs, then it makes no sense to refinance."

Hutching adds that even if you're not actively considering refinancing, it's a good idea to talk to your mortgage professional at least once a year to review your mortgage and see if it is still the best option for you.

"Think of it as an annual checkup to make sure you're still in the best mortgage situation possible," she says.

Posted on Friday, November 19, 2010 at 03:03PM by Registered CommenterElaine in | CommentsPost a Comment

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