Mortgage refinancing allows you to access capital for significant projects while maintaining ownership of your home. If you have projects that need funding, refinancing your mortgage could be the answer. Indeed, since July 19, 2012, federal regulations have allowed homeowners to refinance up to 80% of their property’s market value.
What exactly is mortgage refinancing and how can it help you achieve your financial goals? What costs are involved, and is it the optimal financing option you need? We're here to provide clarity on these questions and guide you through the process.
Mortgage refinancing: how does it work?
Mortgage refinancing involves renegotiating your current mortgage loan to leverage the equity in your property to fund projects like buying a new property, renovating, or pursuing personal endeavors.
This strategy is particularly beneficial for increasing the value of your assets. It also provides an opportunity to choose new terms for your mortgage, potentially securing a lower interest rate to minimize overall interest expenses.
Consulting with a mortgage broker is essential to determine if this approach aligns with your current financial situation.
How can I calculate how much I can borrow?
As mentioned earlier, mortgage refinancing allows you to borrow up to 80% of the estimated value of your home, minus the balance of your current mortgage.
Let's suppose you want to undertake renovations to expand your home, which is valued at $300,000, and you still owe $175,000 on your mortgage. To calculate how much you can borrow through mortgage refinancing, follow these steps:
1- Multiply your home's estimated value by 80%.
For your home valued at $300,000, $300,000 x 80% = $240,000
2- Subtract the remaining balance on your current mortgage from the result.
If you owe $175,000 on your current mortgage: $240,000 - $175,000 = $65,000
Therefore, in this example, you could borrow up to $65,000 through refinancing. This amount would typically be deposited directly into your bank account by the lender.
Will my interest rate change if I renew my mortgage?
Yes, when refinancing, you might negotiate a new interest rate. This could be a different rate than your current one, whether it’s fixed or variable.
Additionally, when refinancing, especially if you borrow more than 80% of your home’s value, you may, depending on the refinancing agreement, need to pay a new mortgage insurance premium.
What are the reasons to refinance a mortgage?
Refinancing allows you to pursue various projects, such as:
- Renovating your home
- Starting a business
- Changing careers
- Financing your children's education
- Continuing your education
- Investing in assets
- Funding a vacation
- Taking a sabbatical or early retirement
- Increasing contributions to RRSP (Registered Retirement Savings Plan)
When to refinance your mortgage?
Refinancing your mortgage is ideally done at the maturity date of your current mortgage term to avoid early repayment charges. However, if you choose to refinance before the renewal date, early repayment fees typically apply.
It's important to understand that regardless of how much time remains on your mortgage term, you have the option to refinance, providing you meet your financial institution’s eligibility criteria.
Furthermore, in addition to early repayment fees, the process often involves, administrative fees such as:
- Appraisal fees
- Title search fees
- Title insurance fees
- Legal fees.
Before committing to refinancing, it's essential to seek guidance from a mortgage broker. This expert can help you calculate the potential penalties and assess whether refinancing at potentially lower interest rates would save you enough to cover the fees, ensuring it aligns with your financial goals.
Different types of mortgage refinancing
1- Home Equity Line of Credit refinancing
When refinancing your mortgage, you can choose to include a Home Equity Line of Credit (HELOC), which provides flexibility in accessing funds based on your home's equity. HELOCs are ideal for borrowers looking for flexible repayment options, allowing them to determine the frequency and method of payments.
The amount of financing available through a HELOC is limited to 65% of your home's purchase price or current market value. Additionally, to qualify for a HELOC, you typically need a minimum down payment or equity of 20% in your property.
It's important to note that HELOCs typically have variable interest rates, calculated on your daily balance, and you only pay interest on the amount you use. This setup provides borrowers with greater control over their borrowing and repayment strategies.
2- Reverse mortgage refinancing
The reverse mortgage, available through the CHIP Residential Income Program, is designed for seniors who convert a portion of their home equity into cash. This option is particularly suitable for retirees who wish to refinance and access funds from their home equity for various purposes, such as covering unexpected expenses, financing home improvement projects, or funding travel plans.
3- Debt consolidation mortgage refinancing
Mortgage refinancing offers a versatile solution, one of which is debts consolidation into a single loan. This strategy simplifies financial management by combining multiple monthly payments into one, potentially at a lower overall interest rate. It’s especially advantageous for individuals facing reduced income or high interest costs.
Over time, juggling several debts such as mortgage payments, auto loans, credit cards, student loans, and personal loans can become complicated. By consolidating these debts through refinancing, you can simplify your payments and potentially enhance your credit profile. This improvement can increase your eligibility for future financing opportunities.
Are you looking to refinance your mortgage?
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