When Does Refinancing Actually Make Sense?

What Is Refinancing?

Refinancing means replacing your current mortgage with a new one — usually to get a better rate, access home equity, consolidate debt, or change your mortgage structure. You can refinance with your current lender or switch to a new one.

The Break-Even Test

Before refinancing, run this simple test:

1. Calculate your penalty cost to break your current mortgage
2. Calculate your monthly savings from the new rate
3. Divide penalty by monthly savings = months to break even

If you plan to keep the mortgage beyond the break-even point, refinancing makes sense. If you're selling in 18 months and break-even is 24 months, it doesn't.

Common Reasons to Refinance

1. Lower Your Rate

If rates have dropped significantly since you locked in, you may save enough to justify the penalty. A 1% rate reduction on a $500,000 mortgage saves roughly $5,000/year in interest.

2. Access Equity (Cash-Out Refinance)

If your home has appreciated, you can refinance up to 80% LTV and take cash out. Common uses: home renovation, investment, debt consolidation. Note: you're converting equity to debt, so be strategic.

3. Consolidate High-Interest Debt

Wrapping $40,000 of credit card debt (20% interest) into your mortgage (5.5%) can dramatically reduce monthly payments — but you're spreading short-term debt over 25 years. Calculate total interest paid.

4. Change Your Amortization

Extending your amortization lowers monthly payments (useful if cash flow is tight). Shortening it pays off your mortgage faster and saves interest.

Watch Out For These Costs

• Mortgage penalty: Fixed-rate IRD can be substantial — get an exact quote from your lender before deciding
• Legal fees: $1,000–$1,500 for a real estate lawyer
• Appraisal fee: $300–$500
• Discharge fee: $200–$350 from your existing lender
• Re-qualification: You must pass the stress test again at the new rate

The Best Time to Refinance

The cheapest time is at renewal — no penalty applies. If you're mid-term and rates have dropped significantly (1%+), the math may still work in your favour. Use our refinance calculator to model your specific scenario.