As a long time (or new) homeowner, it can be easy to grow nostalgic for freedom of property responsibility. The grass is overgrown, the sink needs fixing and every appliance is on the fritz at some point. Having the landlord take care of the never-ending list can seem tempting. But remember the golden ticket of your investment – EQUITY. How do you access it and make it work for you?
The answer is a refinance; payout out your current loan to start fresh with new terms and conditions. Use funds from the refinance to consolidate debt, pursue an investment opportunity, reduce your interest rate, or finally tackle those renovations you’ve been dreaming of. Already have ideas of how this could help you? Below are some of the advantages of refinancing your mortgage.
Restructuring your mortgage can help you save you from paying additional interest in many way. Perhaps you have been in a variable rate mortgage and need to protect against future prime rate increases. Are you carrying balances on credit cards or have a large vehicle loan? By using your equity to pay those debts off you are now saving on interest cost and have a better chance of being debt free sooner.
Lower Cost of Borrowing
Refinancing your home provides you with better loan rates than personal lending, as the loan is secured to your home as collateral. This reduces the risk to the financial institution, and you’ll enjoy lower interest rates than if you applied for a personal loan or a line of credit. When you apply for a person loan or line of credit, these come at a higher cost since the bank does not have security tied to the loan. Lenders provide two different ways to access the funds:
- The first option is a lump sum cash deposit into your account at closing. This is a one-time deposit into your account. You pay back the loan portion with your monthly mortgage payments at the same interest rate as your mortgage.
- The second is a Home Equity Line of Credit (aka HELOC). This is a revolving line of credit where you pay interest but at a different interest rate than your mortgage portion. You can pay off your HELOC at any time without penalty and have access to the available funds at any time. A line of credit is better for short-term borrowing when you know the balance will be paid within a certain time frame.
Extend or Reduce Amortization
Refinancing your mortgage gives you the flexibility to adjust your amortization schedule. Without a refinance, lenders will only follow the amortization schedule set when you originally purchased your home. At refinance you can either extend amortization to reduce monthly payments and increase household cash flow or shorten your amortization to pay down the mortgage faster. The flexibility to make these changes can help with reaching long term financial goals.
Does it all sound to good to be true? Like any major decision, there are pain points to be aware of. Additional costs such as penalties, appraisal fees and lawyers come as a surprise to many. If consolidating debt, ensure you discuss with your broker healthy financial habits to practice avoiding credit concerns in the future; perpetual refinancing can be a slippery slope. Stay tuned for Part II of this blog post where we discuss possible disadvantages. Our brokers are here to walk you through the scenarios and find the right mortgage solution for you and your family. Begin the conversation now!