Re-Financing : Explained
Everyone who has a mortgage has heard of re-financing, but there is a lot of cloudiness and confusion as to what it means. Common questions that arise include, "why should I re-finance?" and "when is the best time to re-finance?". To begin with, re-financing is getting out of your existing mortgage in order to get into a new one. Depending on your situation there may be more than one good reason to consider it as an option.
Currently interest rates are at record lows which makes for a great time to consider your options, let us take a look at some of the options and reasons for re-financing:
1. You want to take advantage of lower interest rates (potentially save thousands)
So, you already have an existing mortgage and have heard about the record low interest rates. Don't let the penalties throw you for a loop, there is a very good chance that you could take years off of your term and lower your monthly payment, thus putting thousands of dollars of interest back in your pocket. If you have a variable rate you will pay 3 months interest, if you are on a fixed rate, you will owe the greater of 3 months interest or the interest rate differential (IRD). If you still have questions, all it takes is a conversation with a certified mortgage broker to help determine if breaking your mortgage early will be worth your while.
2. To take equity (cash) out of your home (ex. complete a home reno)
The reasons to take money out of your mortgage vary, whether you are completing a renovation (enhance house value) , purchasing a second home (vacation or investment) or are just cash poor (need a little help). More and more people are making the decision to access their home equity to help them out. You have the ability to borrow as much as 80% of the value of your home.
Your home is worth $500,000
Your mortgage is $250,000
$500,000 x 80% = $400,000
(ome value x maximum loan to value ratio = maximum mortgage amount)
$400,000 - $250,000 = $150,000
Your available equity in this scenario is $150,000.
3. To Consolidate debt
Consider this, the average consumer debt in Canada is over $27,000, with credit card interest rates averaging around 20% and car loans approaching 10%. It's no wonder why so many people are taking advantage of the record low mortgage interest rates to make one payment. Consolidating debt is taking all of your unpaid credit cards, car loans and other payments and reducing them into one easy payment. This can help to free up your cash flow and get your finances in order. If you have consumer debt, now is an excellent time to call and find out about your options.
4. To change your amortization period (pay off house faster, or extend loan to lower payments)
Changing your amortization period can be used to achieve (among other reasons) two very specific objectives. First of all, increasing your amortization period will allow you to reduce your mortgage payments, as it may be the case in a time of financial hardship. The second common scenario would be to pay off your mortgage faster, if your current mortgage has restrictions on your pre-payment capabilities it may be worth looking at re-financing to open up your options.
Cost to Re-Finance
The cost to refinance your mortgage depends on the strategy you use to access equity or lower your interest rate. No matter which strategy you use you will always incur legal costs as a lawyer must change the financing on title. The great news is that there are often options for lenders to cover part or all of this cost!
If you are breaking your mortgage in the middle of your term to access equity or lower your interest rate your lender will charge you a prepayment penalty (see above).
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