Want to refinance before your renewal? Now or at maturity — how to weigh the penalty against the rate

What doing it now costs

The penalty: usually the higher of three months' interest or the interest rate differential (IRD).

Repricing the whole mortgage early: a refinance is a new mortgage, so it generally isn't just the new money — your existing balance moves to the new rate from today. If your contract rate is below today's rates, this often costs more than the penalty.

Fees: the appraisal, title search, title insurance and legal fees. You'd pay these at maturity too, so you can leave them out of the comparison.

What waiting costs

The interest you keep paying on high-rate debt over those months — credit cards, a line of credit, a car loan. The higher the rate and the further away maturity is, the bigger this gets.

Some needs can't wait: a practice renovation on a schedule, a tax bill coming due, a child's tuition, the down payment on your next property. If yours can't, look at the bridging options below.

Two situations, two different calculations

Your contract rate is below today's (a low rate locked in a few years ago): lenders usually apply the IRD only when your contract rate is higher than current rates, so the penalty will most likely be three months' interest — but repricing the whole mortgage early is a big cost. An example (illustrative numbers, not a quote): an executive owes $700,000 on a 5-year fixed at 2.69%, with 10 months to go, and wants to take out $150,000 to clear a line of credit at 8%. Doing it now: three months' interest is about $700,000 × 2.69% × 3 ÷ 12 ≈ $4,700. If the new rate is 4.4%, moving the $700,000 to 4.4% ten months early costs about $700,000 × (4.4% − 2.69%) × 10 ÷ 12 ≈ $9,975. What it saves is ten months of interest on the $150,000 line of credit: about $150,000 × (8% − 4.4%) × 10 ÷ 12 = $4,500. Doing it now costs roughly $10,000 more, so waiting until maturity wins.

Your contract rate is above today's (signed when rates were high): moving the whole mortgage to the new rate saves money, but the penalty will most likely be the IRD — which is built on exactly that gap between your rate and today's — so the savings and the penalty often come out close. Compare the actual penalty figure from your lender with the interest you'd save over the rest of the term; the method is in Switching lenders for a lower rate: how the penalty is calculated, and when switching pays off.

Can't wait, but don't want to pay the penalty? Two ways to bridge

Open a home equity line of credit (HELOC), or use a line you already have, to replace the most expensive debt now, then refinance everything at maturity. A HELOC also requires approval and the stress test, and can go up to 65% of the home's value.

Ask your current lender about renewing early (blend-and-extend): your old rate is blended with the new term's rate, with no prepayment penalty, though there may be administrative fees. Whether you can borrow more at the same time, and how the new money is priced, varies by lender — ask, and get it in writing.

If you're waiting for maturity, when to start

A federally regulated lender, such as a bank, must send you a renewal statement at least 21 days before the term ends. A refinance needs a new approval and an appraisal, though, so start a few months ahead rather than waiting for the statement — see How early can you lock a rate before renewal?

A refinance at maturity means passing the stress test, whether you stay with your lender or move. The exemption for switching lenders at maturity covers only a same-amount switch with no longer amortization; borrowing more money takes you out of it.

Common questions

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