How To Access Your Equity Through Refinancing
As you pay down your mortgage, you build equity in your home. This equity can be referred to as the percentage of the property you’ve currently paid for. In other terms, equity is the current value of your home, less your mortgage balance. The more mortgage debt you pay off, the more equity you gain. Similarly, if the value of your property increases, so will your equity. Lenders will loan up to a total of 80% of your home’s current value and will be subject to standard lending guidelines. This equity can be withdrawn to help you cover different expenses like a second home, renovations, or even to consolidate debt. To access the equity in your home, there are a few different mortgage options to consider. One of the more common solutions is refinancing.
Refinancing is the process of renegotiating your existing mortgage, allowing you to tap into your home equity or take advantage of better mortgage rates and terms. It is an in-depth process, that ultimately results in acquiring a new mortgage. The first step in the refinancing process is to have your property appraised at today’s current value. The second step requires you to break your mortgage and renegotiate a new contract with either your current lender or a completely new one. Upon the completion of your application and lender satisfaction, you will be able to pull out funds in excess of your current mortgage as liquid capital, resulting in a slightly higher mortgage balance, to in which will be set at new terms with a new rate.
The pros and cons of refinancing
Like any mortgage product, refinancing has advantages and disadvantages. By making sure you know what they are, you can make the right decision based on your situation. Here are some of the top pros and cons of refinancing that you’ll need to consider:
1. Peace of mind
If you’re looking to relieve financial stress, you can consider consolidating your high-interest debt into a single monthly payment through the process of refinancing. This process not only simplifies things into one payment, but it also brings your high-interest monthly payments down to a far lower interest rate, ultimately resulting in thousands of dollars in savings each month.
2. New interest rate
Mortgage refinancing is typically available at the market’s current interest rates. While these rates will be unique to each person’s own financial situation, they will almost always be substantially lower than that of your average credit card, line of credit, car loan, student loan, etc. Hence the opportunity to tie everything together under one roof and reap the financial savings.
When working with your trusted mortgage broker, you will find countless options that are unique to your very own situation that provide a solution to your needs. Certain alternative lenders are willing to consider a wide array of non-traditional sources of income, that of which include those who are self-employed individuals. These lenders are even flexible with different debt ratios as their guidelines are far more flexible than what you’ll see on the conventional side with Big Banks.
1. Additional costs
Refinancing your mortgage entails additional costs like early payment fees. These penalties will depend on how close you are to the maturity of your mortgage. You’ll also need to pay for an appraisal of your home as the amount of equity available through refinancing your home is based on the current appraised value of the property, less on your mortgage balance.
2. Longer amortization
When you refinance your mortgage, it may mean you’re stretching out your amortization to keep the payments affordable. While this is helpful, it could affect your ability to save up for retirement.
By refinancing your mortgage to incorporate debt, you’ll need to qualify for a new mortgage. If your financial circumstances have changed, getting refinanced could be challenging. If you feel you won’t be eligible with a traditional lender, talk to your mortgage broker about alternative options.
Reasons to refinance
1. Debt consolidation
Debt consolidation is the process that provides you the opportunity to use your existing equity to pay off your high-interest consumer debt, while borrowing that money (equity) at a far lower interest rate in the form of a mortgage. If your lender agrees to it, they will pay off your debts along with your previous mortgage and combine all your payments into a single monthly mortgage payment at a lower interest rate. Refinance rates tend to be far lower than other debts. For example:
A. Credit card debt can be at 21.99% Interest
B. Retail store debt could be above 27% interest
C. Car loan debt is between 5% to 7% interest
D. Line of credit is at 4% to 7% interest
2. To take advantage of lower rates
If you find that your current mortgage rate is too high, and you expect the rates to drop, refinancing is a strong solution that allows you to take advantage of the money-saving opportunity that you will find within that new and improved market rate. Although there may be pre-payment penalties involved, the lower rate often will far exceed that upfront cost. Your mortgage broker can help evaluate your situation and help you understand your refinance options to ensure you make a beneficial decision.
3. To acquire funds
Besides debt relief, refinancing offers you the opportunity to access your home equity to fund expenses like home renovations, a down payment for a second property, or investment funds. Alternative reasons to refinance are, but limited to, stock investments, health costs, emergency funds, traveling, weddings, toys, and more.
It’s important to not confuse refinancing with mortgage renewals or HELOCs.
While sometimes thought of as the same, refinancing is very different from renewals and HELOCs. These financial options can help you change your debt situation and cover new expenses but aren’t the same as refinancing. Let’s look at them a little closer to see the differences.
Mortgage renewal: Upon the completion of your mortgage contract, also known as your maturity date, you are able to renew your current mortgage and set new terms and rate. During the renewal period, you can negotiate a new term and interest rate based on the pending mortgage amount with your lender. While your lender will almost always offer you a below average offer upfront as your maturity date approaches, it’s important to speak with your trusted mortgage professional to seek all the market’s best options available to you.
HELOC: A HELOC or home equity line of credit is a different way of tapping into your home equity. It requires an appraisal and the same amount of paperwork as refinancing before funding is approved. But, unlike refinancing, the interest on a HELOC is much higher. Also, with a HELOC, you can’t access all of your home equity at once. You can borrow a specific amount at a time. That being said, refinancing is a better option if you’re looking to consolidate debt instead of spending it.
If you’d like to learn more about what refinance options you may have, reach out to us today at Boychuk Mortgage Group and we’d be happy to help.