If you are looking for a way to access cash from the equity in your home, one of the ways to do this is through refinancing. Refinancing works by breaking your current mortgage and getting a new one for more than you currently owe your present lender. The additional amount is paid to you in cash and you can use that money for whatever you see fit. Many people choose refinancing as a way to pay for large expenses such as home renovations or to consolidate their debt.
One advantage of refinancing is that interest rates are usually much lower than they are on other types of loans. And with the current five year fixed rate being at its lowest point in over two years, now is a great time to take advantage of this mortgage tool.
In Canada, homeowners are allowed to borrow up to 80% of their home equity when they refinance. So for example, if your home is worth $500,000 and you still owe $200,000 that means you have $300,000 in home equity – meaning that you could refinance your mortgage and receive up to $240,000 in cash.
Determining how much your home is worth however is not as simple as just looking at what the buying price was when you purchased your home. Chances are, if you have owned your home for any length of time, your home value has gone up while your mortgage has been going down. This means you have more opportunity to borrow against the value of your home.
One of the things that lenders will often do to determine how much they are willing to lend a homeowner is to use a measure called loan-to-value (LTV) ratio.
The LTV is based on your loan balance. Typically, it will require a professional appraiser to determine your home value. The ratio is the difference between the value of your home and what you owe.
In order to maximize your LTV, you need to increase the amount of equity that you have in your home. This needs to be done before you have to borrow against that equity.
Strategies include:
- Make your mortgage payments bi-weekly rather than monthly. This will add a full month’s additional payment each year and help pay off your principal.
- Keep your home neat and well-maintained.
- Make smart home improvements that increase the value of your home. (consider consulting a real estate agent to determine how much value a particular improvement might add to your home.)
If you are interested in learning more about refinancing and how to maximize your LTV, contact Akal Mortgages today!
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