Mortgage refinancing refers to when homeowners get a new mortgage to replace their current mortgage, usually because they can obtain a better rate of interest and/or better interest term. 

In short, mortgage refinancing usually involves paying off your first mortgage with money borrowed from a second mortgage.

As with all major financial decisions, always consult with a financial expert before deciding whether or not to refinance your current mortgage.

The Benefits of Mortgage Refinancing

Most home buyers are attracted to mortgage refinancing because it gives them a chance to take advantage of lower interest rates and/or better payment terms. Some benefits of refinancing include:

• Locking in Better Rates. Fixed rate mortgages pegged to today's low interest rates can save you tens of thousands of dollars over the course of the mortgage compared to your current loan agreement.
• Leveraging Your Credit History. Many homeowners buy their first property when they're young and don't yet have a perfect credit history. If a number of years have gone by and you've established a great track record, banks and financial institutions may reward your hard work with better interest rates or payment terms than your original mortgage.
• Consolidating Debt. Some homeowners use mortgage refinancing to obtain the money needed to pay off credit cards or other debts. In many cases, the interest rate and payment terms for a mortgage are far better than other loan types.
• Leveraging Your Home Equity. When you bought your first home, you probably had to scrape to save for a down payment. But now that you've been successfully paying your mortgage for a few years, you've built up equity in your home. Banks and lenders are far more inclined to give you favourable interest rates and payment terms when you can leverage the equity you've built up in your home.

Methods of Refinancing Your Mortgage

Generally speaking, homeowners have three broad choices when it comes to refinancing their mortgage:

• Early Repayment of Your Existing Mortgage. The classic definition of mortgage refinancing, this refers to getting a second mortgage that will, in part, pay off the remaining balance of your original mortgage.
• Securing a Home Equity Line of Credit. This method can be an affordable way to borrow money as you'll only be responsible for interest payments on any existing balance while paying off your existing mortgage.
• Blend and Extend. Your current mortgage provider may offer a "blended" refinancing scheme where you get a more attractive interest rate than your current mortgage but one that's higher than the market rate.
• The Risks of Mortgage Refinancing

A logical thought is that you should immediately take advantages of lower interest rates and refinance your mortgage. 

Although interest rates may be at or below all-time lows, there are still a number of important factors to consider before taking the plunge and refinancing your home:

• Fees. Banks and other financial institutions are going to charge potentially hefty fees to refinance your mortgage. Always inquire about fees to determine whether it's financially worth it to refinance.
• Credit Scores. The interest rate and payment terms you'll get from a bank or financial institution are dependent on your credit score. Always check your credit score before even attempting to refinance your mortgage. Remember, being declined for a loan can negatively impact your credit score.
• Longer Payment Terms. It may be frustrating to be paying a higher interest rate than your neighbours right now, but most mortgage refinancing deals involve extending the length of the mortgage, meaning you'll be on the hook for a new 10, 20, or 25-year repayment agreement. In some cases, it makes more financial sense to pay your mortgage off faster at a less-favourable rate than refinancing and committing to a new, lengthy mortgage.
• Penalties. Your original bank or financial institution may not let you go without assessing some penalties. Be sure to check with your current mortgage provider to learn exactly how much it will cost to pay off your mortgage ahead of schedule.

When Is Refinancing the Right Choice?

You'll need to speak to a professional adviser before making any decisions, but here is a brief formula to help you determine whether mortgage refinancing may be right for you:

• Add up the total costs of interest payments remaining for your existing mortgage.
• Add in the cost of penalties for paying off your current mortgage ahead of schedule.
• Estimate the total amount of interest you will pay for a refinanced mortgage.
• Add in the costs of any fees.
• Choose the option which has the lowest total cost.

According to the Canadian Mortgage and Housing Corporation, stress on the mortgage market has lead to rates trending upwards in Alberta. If you're able to land a better rate than you currently have on your mortgage, now would be your chance to take advantage of low rates before they rise further. 

Take your time, explore a variety of options, and carefully do your research to find the best rate. Be sure to consult with a trusted financial advisor before making any decisions, and use a detailed cost/benefit analysis to know which choice is the right one for you.

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