Should you refinance? Break-even analysis, monthly savings, and lifetime comparison. Canada: semi-annual compounding.
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When Does Refinancing Make Sense?
General rule: refinance if you can reduce your rate by at least 0.5%, you plan to stay past the break-even, and lifetime savings exceed closing costs. In Canada, also factor in IRD (Interest Rate Differential) penalties for fixed-rate mortgages — which can be large.
Breaking a fixed-rate mortgage triggers an IRD penalty — the greater of 3 months' interest or the difference between your rate and the lender's current posted rate applied to the remaining balance. On a $400K mortgage at 5.99% with 3 years remaining, the IRD can easily be $15,000–$25,000. Variable rate penalties are typically just 3 months' interest. Always get the exact penalty from your lender before proceeding.
Typically 2–5% of the loan: origination fee (0.5–1%), appraisal ($300–600), title insurance (~$1,000), recording fees, prepaid interest. A no-closing-cost refinance rolls costs into a slightly higher rate. Calculate break-even to ensure you stay long enough to recoup costs.
⚠️ Does not include prepayment penalties. Get your exact penalty from your lender before deciding.
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