Refinancing a mortgage can be a good idea if you get a lower interest rate, and this is sure to get the attention of many homeowners. The first question to ask yourself is whether you should refinance your mortgage, looking at your income level and priorities. Where income is concerned, mortgage payments should not take more than thirty percent of your gross monthly income. If your mortgage payments take over one third of it, it may be a good idea to refinance. Second, you may be repaying an adjustable-rate loan, with an interest rate which has increased, or your total income might have dropped. Then you may consider this option.

So, how to best refinance a mortgage? One option is to modify the terms and conditions of your current mortgage rather than refinance. Discuss this with your lender, and they may agree to lower your interest rate in exchange for a lump sum that you pay them, say, a couple of hundreds of dollars. This can be a good solution if rates have dropped, and borrowers already refinance. It won’t hurt to ask whether modification is possible. If you prefer not to work with your existing lender or another institution offers better interest rates, you may consider their offer. At the same time, it is important to check the terms. They may have a different schedule of fees, with a copy of a reference document costing $20 or so. Or you may have to deal with bank representatives only by phone, the bank being halfway around Canada, instead of talking to an employee at your local branch. Of course, even if you choose to refinance your mortgage with the original lender, you will have to re-qualify, meaning that the lender will review and verify your financial situation.

Remember that with refinancing, you will be required to cover the closing costs. The amount may be higher than the savings you get with the lower interest rate. The point in which the borrower’s savings offset the new loan’s closing costs is called break-even period. You should normally receive an estimate of the loan’s closing costs from the new lender once they receive your application. This is helpful in spotting any hidden costs which can be avoided. If you do not receive an estimate, ask them to provide one. If they refuse to do so, you may want to look for another lender.

Finally, if you are offered no-cost refinancing, be sure to ask what it means. Different lenders define this differently, and there are two main ways to go about avoiding upfront fees. Under the first arrangement, it is the lending institution that will cover the loan’s closing costs, with borrowers being charged a higher rate of interest. This interest rate will apply over the term of the loan. With the second option, the refinancing fees are rolled into or included in the loan, being incorporated in the principal amount. Then you will not have to pay cash upfront, paying interest and fees over the term of the loan.