By becoming owners, many people give up their personal or professional projects for lack of means, but especially because of the debt generated by the acquisition of real estate. Whether it's renovating a house, starting a business, or a travel project, getting financing is complicated when you already have a mortgage.
As of July 9, 2012, the federal government allows you to refinance up to 80% of the market value of your property. As the interest rates are quite low and the value of real estate keeps increasing, this option gives you the opportunity to realize your most expensive projects while remaining an owner.
What is mortgage refinancing and what is it for? What are the costs associated with it? Is this the best solution to get financing? We're here to answer all your questions.
What is mortgage refinancing?
Mortgage refinancing involves renegotiating your current mortgage using the equity in your property. This financing option gives you the opportunity to choose new terms for your mortgage, in addition to benefiting from a lower interest rate so as to reduce your interest costs.
Refinancing a mortgage allows you to consolidate debt or finance other life projects. This financing option should ideally be used to increase the value of your asset. Talk to your mortgage broker to determine if this is the best solution for your situation.
Mortgage refinancing: what is it for?
Between home mortgage, car loan, student loan, personal line of credit and other credits of all kinds, the various monthly payments can become troublesome in the long run. You should know that the accumulation of several simultaneous debts affects your credit report and reduces your chances of obtaining a loan to finance new projects.
Mortgage refinancing is a suitable solution for consolidating debts into a single loan. You reduce your payments to a single monthly debit by simplifying the management of your debts. At the same time, you save money thanks to a reduced interest rate. Mortgage refinancing is particularly used by people whose income has declined, or who find their interest costs too high.
In addition, this solution allows you to fulfill goals such as:
- Funding a home renovation project
- Launching a business
- Making a career change
- Financing your children's educations
- Going back to school yourself
- Acquiring an income from investments
- Paying for a trip
- Taking a sabbatical year or early retirement
- Increasing your RRSP contributions
Mortgage refinancing: how much can I borrow?
As discussed earlier in the article, mortgage refinancing allows you to borrow a maximum of 80% of the appraised value of your home, minus your mortgage balance. Suppose you want to start renovating to expand your home, which has a market value of $ 300,000 and you have $ 175,000 in mortgage remaining. We obtain :
$ 240,000 (80% of the house's appraised value)
- $ 175,000 (remaining mortgage balance payable)
= $ 65,000 (the amount you can get with a refinance)
In this case, the maximum amount you can get through refinancing will be $ 65,000. Your lender will deposit this amount directly into your bank account. Be aware that refinancing may result in a change in the interest rate of your current mortgage, or a different interest rate for the refinanced part. You may also have to pay a new mortgage insurance premium if your current mortgage changes.
Different types of mortgage refinancing
Mortgage cancellations
Regardless of the number of years before the term of your mortgage, it is possible to break the contract by proceeding with a mortgage refinance. However, you will need to settle the penalties associated with early repayment of your loan. Your broker is in a good position to help you calculate the amount from penalties. It will be able to determine whether a refinancing would make it possible to make the losses associated with these costs profitable thanks to new financing (the interest rate of which would be lower).
Home equity line of credit
The home equity line of credit represents a product suitable for borrowers who prefer flexibility in their repayments, since it is you who define the frequency and method of payments. The financing you will have by choosing a home equity line of credit cannot exceed 65% of the purchase price or market value of your home.
In addition, the down payment or equity in your property must be at least 20%. Note that the interest rate on a home equity line of credit is variable and calculated on your daily balance (you only pay interest on the amount used).
Reverse mortgage
Reverse mortgages are available under the CHIP Reverse Mortgage, which was previously known as the Canadian Home Income Plan. Designed for seniors, this option is particularly suitable for people who are retiring and who would like to transform a portion of the equity in their property into cash to manage the unexpected, bring a project to life, travel...
Mortgage refinancing fees
By refinancing at the end of the term of your mortgage, you are exempt from prepayment charges. However, if you refinance before this deadline, then you will likely be charged a prepayment charge. Other administrative fees may apply such as appraisal fees, title search fees, title insurance fees, and legal fees.
You should know that these costs will be amortized by the savings made with a new low-interest mortgage. On the other hand, your new lender could cover some or all of the costs. You can consult with your mortgage broker to find out more.
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