Refinancing Your Mortgage
A lot of people wonder if they should refinance their mortgage, but are unsure if it is a good option for them. There are many pros to refinancing, however everyone’s situation is different. Are you contemplating a refinance? Take a quick look here and see if it is the right option for you!
How Does Refinancing Work?
Firstly, let’s look at how a refinance works. When you refinance your mortgage, you are looking at accessing the existing equity in your home. Lenders allow you to refinance up to 80% of the CURRENT VALUE of your home. This often means that they will require an appraisal of the property to accurately assess the property’s current value. This is often not the amount that you paid for it originally.
Once the property has been evaluated, the lenders will calculate what 80% of the new property value is and then subtract the outstanding liabilities on the property. This includes any mortgage amount outstanding and any other leans on the property (ex. A secured line of credit). The amount that remains is your existing equity that can be accessed through a refinance. Existing equity = (current value X 0.80) – (outstanding mortgage amount + other outstanding leans on the property).
After calculating what the accessible equity is on the property, we can now explore the reasons to refinance and what would work best for your situation.
Reasons To Refinance
Pay off bad debts
One of the main reasons people decide to refinance is to consolidate any bad debts. Many of which may be incurring high interest. This includes; credit card debts, lines of credit, private loans, vehicle loans, etc. By refinancing your property, you are able to pay off some of these bad debts and have everything included in one monthly mortgage payment. Often this monthly payment comes at a lower interest rate than what you are currently paying on all of those other loans. It may also increase your buying power when trying to secure a loan for another purpose. This could be buying a second home or income property, new car, applying for a loan, etc.
Better interest rate
Perhaps your current mortgage has a high interest rate and you would like to get into a more favourable mortgage rate than what you are in. Refinancing can help you take advantage of the current mortgage rates and allow you to save money on your mortgage payments. There may be penalties included in breaking your mortgage, so it is best to speak to a professional first to make sure you are indeed saving enough money over time to justify breaking the current mortgage and refinancing to take advantage of a better rate.
Home improvements
Another reason to refinance your property is to do some home improvements. Perhaps you are looking to update your kitchen or bathroom, finish a basement, build a deck or patio, build a new garage, fix a roof, or simply some smaller improvements around the house. You are effectively investing in your own home when you refinance to do home improvements. As these improvements are completed you increase the value of your property. If you are looking to sell your property in the future you will now be able to get a higher property valuation upon sale and charge more for the property. If you wish to rent out some space in your home, you can also charge more for the rental unit as it now has a more valuable space to offer while in turn generating more interest in the space itself.
Purchasing new property
Are looking to purchase a new property? If so, refinancing may be a great solution as well. When looking to buy a second home, cottage, or investment property, it can be difficult to find the available funds to do so. You can actually use the equity in your current home as a source of down payment on the new property. This way you can save the personal funds and savings you may have to help furnish the new home or complete any renovations or improvements that may need to be done on the new property. A second home or investment property is a great way to generate an alternative passive income. It can be used to help broaden your investment portfolio.
Expand investment portfolio
When it comes to investments, refinancing is also a great way to access funds to invest. You can expand your investment portfolio by taking the refinanced funds and use them to invest in the stock market. Once again, this can help generate a source of passive income to help you enjoy life more in retirement. Investing is also a great way to have extra funds if ever you want to buy a new property, do home improvements, buy a new car, go on a trip, or simply spoil yourself with a purchase of some other kind without having to access your personal savings.
These are some of the main reasons why refinancing may be able to help you. There are many other reasons why you may wish to refinance. This includes paying debts in the case of divorce, pay bills due to a personal accident, pay legal fees, etc.
Cost of Refinancing
It should be noted that sometimes there are also fees included when completing a refinance. One fee may be paying for an appraisal. When the lender is looking to evaluate your property, they often require an appraisal to be done. This appraisal may be charged to you prior to completing the refinance.
Secondly, breaking your mortgage due to refinancing prior to the renewal date may result in penalties to pay as well. These penalties can sometimes be very high depending where you are in the mortgage term. Other factors include the remaining balance on the mortgage, whether you are in a fixed or variable rate mortgage and of course what your current mortgage rate is
It is always best to speak with an experienced mortgage professional prior to engaging in a refinance. We can help you decide what the best course of action for you may be. We can put you in the best position possible when it comes to refinancing your property. Schedule a meeting today and find out how I can help you prepare for your future!