In this blog, I’m going to teach you how to access your home’s equity. This is known as refinancing your home, Or refinancing your mortgage.
You need access to money now, But all of it is tied up in your home. Refinancing is a way for you to access that money now.
Let’s define what refinancing your home actually means. When you refinance your home you are breaking your current mortgage agreement and starting a new one. This can be through the same lender, Or you can transfer to a new lender.
There are several reasons for refinancing your home. You may be trying to get a lower mortgage rate, Access equity in your home, Or consolidate your debts.
1. Negotiating a better rate
Before I get into how to refinance your home, Let’s talk about why you would do it in the first place. The first reason homeowners decide to refinance is to negotiate a better interest rate on their loan.
You can save a lot of money after refinancing your home, IF you can negotiate a better interest rate. If you hold a variable rate mortgage, then expect to pay a penalty of three months interest. And if you hold a fixed-rate mortgage, Then you will pay either three months’ interest or the interest rate differential penalty (IRD). Whichever one costs more at the time of refinancing. A lender will often refer to the IRD if the interest rate or your mortgage is higher than the current interest rate, Or if you signed up for your mortgage less than five years before refinancing.
Although you will pay a penalty for refinancing in the short term, In the long run, You could end up saving a lot of money because you’re paying less interest. Run the numbers and figure out how much you will save with a lower interest rate, And compare that number with the penalty you’ll be charged.
2. Using your home to access equity
Refinancing your home can be a great way to access the equity in the property. Depending on how much you owe, You could access up to 80% of your home’s value. There are a variety of reasons you may want to access this equity, Including money for home renovations, your children’s education, or investment opportunities. Other methods for gaining access to your home’s equity include extending your mortgage, And taking on a line of credit attached to your home’s equity.
3. Consolidating your debt
The third most common reason for refinancing is to consolidate debt. If you have a mortgage, car repayments, or credit card debt, It can make sense to refinance your mortgage in order to consolidate your debts. This is essentially a way for you to get better interest rates on the debts you have.
For example, Personal loans and credit cards tend to have much higher interest rates than home loans. So after consolidating your debt you are able to pay less interest on that money owed. Essentially you are refinancing your home to pay off all your existing debts. Then all you have to do is worry about paying off your mortgage, Which will be at a lower interest rate than your other debts, After refinancing.
No matter what your reason for refinancing, You will always incur a prepayment penalty, And possibly legal fees associated with changing the financing agreement on the loan. Be certain you understand the costs associated with refinancing before you go through with it.
Now that you know some reasons behind refinancing your home, Let’s talk about how you can do it.
4. Changing the terms of your mortgage early
The first way you can refinance your home is to break your existing mortgage with your lender early. Breaking your loan agreement early will always incur a fee from your lender. The fee is usually three months’ worth of interest payments. If you negotiate a better rate, Then paying this fee can benefit you in the long run. It all depends on how much you’ll save over the course of the loan versus how much you’ll pay in prepayment charges. Many times taking a small hit on the prepayment fee pays itself off over time.
5. Get a line of credit on your home
Getting a line of credit on your home can be a great way to access your property’s equity. There is a huge convenience factor in being able to access this equity whenever you need to. Taking out a line of credit against your home is like having a credit card, The difference is, Because it’s a secured loan, The interest payments are MUCH lower. Which means you’ll have an easier time paying back the money you owe. You can refinance your mortgage after taking out a line of credit against your property with your current lender.
6. Extending your mortgage
The last thing you can do to refinance is extending your existing mortgage. This is a bit like consolidating your debts. The difference is instead of consolidating debt from other lenders into your mortgage loan, You borrow additional money from your lender at the current market rate, And blend the two interest rates together. This will usually result in a mortgage rate that is higher than the most competitive rates on the market, So do your research to ensure you compare this rate against the savings if you break your mortgage.
Next Steps If you’re feeling like refinancing your mortgage is the best thing for you, The next step is speaking with a licensed Canadian mortgage broker. In your consultation, They’ll be able to look into your specific situation and offer you the best options. If you do decide to refinance they can help you find the best lenders and programs to pursue.
Remember, When refinancing your home you will more than likely face a prepayment penalty, So make sure you research how much the prepayment penalty will cost. This penalty is usually agreed to when you first signup for a mortgage.
Now if you wanna know more tips about real estate feel free to contact me Danny Greene by sending an email at Danny@CalgarysAgent.com or call the number 403-605-6626!