What is a mortgage refinance?

Refinancing a mortgage means paying off your current mortgage by replacing it with another mortgage. 

The benefits of refinancing

 

  • Reduce your payment – If interest rates drop significantly, refinancing could lower your payments or help you pay down your mortgage faster.

  • Use home equity – If you’ve paid down part of your mortgage already, you can use that home equity to:

    • Pay for home upgrades
    • Buy more property
    • Contribute to other financial goals
    • Help lower the cost of borrowing and pay off higher interest rate debt (e.g., credit cards)

How does a refinance work?

Mortgage refinancing is breaking your original mortgage contract and replacing it with another. 

Unless you’re blending your current rate with a new rate and extending your term, or unless you have an open mortgage, it’s best to refinance at the end of your mortgage term to avoid a prepayment penalty. 

Current regulations allow homeowners to borrow up to 95% of the appraised value of their home with default insurance, or up to 80% without default insurance.

Let’s say your home is worth $450,000, and you’ve been paying down your mortgage for some time, so you only have a balance of $100,000 left.

In this example, 80% of the value of your home would be $360,000 and because you still have $100,000 left to pay, you can access about $260,000 in equity.