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!
Six Reasons to Refinance Your Home Mortgage
Refinancing your mortgage simply means breaking your current mortgage and getting a new one – often at a lower interest rate. Since refinancing means your will have to break your mortgage, it also means that doing so will likely carry a financial penalty. And the further away you are from your renewal date, the higher that penalty is likely to be.
Nevertheless, a mortgage refinance can be a powerful financial strategy under certain circumstances. Here are six reasons that you might want to refinance your home mortgage.
- Lower your monthly payments.
Do you wish you had a little extra money left over each month? You may be able to get that by refinancing your mortgage, if you can get a better interest rate. If rates have dropped, you may want to investigate whether refinancing makes sense for you.
- Your credit score has improved.
If your credit score was less than perfect when you got your present mortgage, you may have had to accept a mortgage with an alternative or private lender at a higher interest rate. If you have been working diligently to improve your credit score, it is possible that you may now qualify for a loan with an A lender – or at the very least a better interest rate than you are currently paying.
- The fixed period on your adjustable rate mortgage is ending.
If you have an adjustable rate mortgage with a fixed portion, it is possible that your interest rate is about to go up. Refinancing your mortgage and switching to a fixed rate mortgage can protect you from future increases.
- You want to pay off your mortgage faster.
Perhaps you are now in a position where you can afford to pay more on your mortgage each month – either because of a reduction in expenses or perhaps because of a promotion at work. You might want to consider refinancing to a shorter amortization period so you can pay off your mortgage sooner.
- You want to take cash out.
If you have built up some equity in your home, then refinancing your mortgage is one way to take advantage of that equity. You can do this by refinancing for a higher mortgage than you currently owe and taking the difference in cash. People use refinancing to take cash for a number of reasons including home renovations, start-up capital for a business, emergency expenses, etc.
- You want to consolidate your debt.
If you have a lot of high interest debt, refinancing your mortgage can help you lower your interest and possibly even the overall amount that you will have to pay each month. You do this by refinancing for a mortgage that is equal to what you already owe plus the amount of debt you wish to consolidate. You then use the cash to pay off your high interest debts.
If you think that refinancing may be the right strategy for you, it is best to consult with a mortgage broker who can go through the numbers with you. Contact Akal Mortgages today to schedule and appointment.
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