Refinancing to Reduce Interest Rate
Yahoo! The rates are dropping! But you've still got 3 years on your mortgage and you're paying a couple percentage points more than the going rate.
What to do?
Your best option is to approach your current lender and try to get an 'early renewal' on your mortgage.
Some mortgage lenders will charge a penalty for early renewal. You will have to determine if the cost of the penalty is less than the savings you will get with the new mortgage. If not - you'll be best to wait.
Some lenders will renew early without penalty, but will give you a 'blended rate'. What this means is you will have a 'new' mortgage, and you will be paying a rate that is a 'blend' of your existing interest rate and the new current interest rate.
Confused? Don't worry. While it is a bit complex, it boils down to this - based on the term picked for the 'renewal' and the time left on your current mortgage, the lender will 'blend' the two interest rates. So you will be paying a 'blend' of your existing rate and the new lower rate. While you won't get a rate as low as the lender's current best rate, you should find that you will be paying a lower rate overall than if you'd stayed at your existing interest rate.
Again, do your homework. This is only a good deal if you have a fair amount of time left on your mortgage, and you are confident that interest rates won't fall a lot further! If interest rates continue to go down, and you are now locked into a longer term at the blended rate, you may find that it wasn't a good deal.
Still confused? Talk to a financial planner or advisor. They can take all the confusion out of this.
Mortgage Guide 101. Used with permission.