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Refinancing & Home Equity 101

Refinancing & Home Equity 101


Since it’s back to school time, let’s take a look at a question I’m often asked and learn more about mortgage refinancing and home equity options.

There are many reasons why people want to refinance their mortgage and start fresh with something that’s more in tune with their current financial situation. For example, perhaps you’re paying too high an interest rate or you want to change your mortgage term to something more convenient. Maybe you want to free up funds to pay down a worrisome debt load, your kids’ tuition, start up a small business, or tackle a much-needed home renovation…or better yet a much-needed vacation! Whatever your goals, you’ll be happy to know that refinancing your mortgage can be an excellent way to save money in the long run, by lowering your monthly payments, reducing overall interest payments, or alternately…to access equity in your home so you can simply have more cash on hand when needed.

Finding a better mortgage

Despite some of the predictions in the past few years that interest rates were going up, we haven’t seen that happen yet. In fact, they are still at record lows! By refinancing, you may save thousands of dollars by getting a lower interest rate, even if it’s only 0.5% less. Be sure to find out what, if anything, you’ll need to pay in fees or penalties and make sure that you’ll actually be saving money in the long run before making a switch.

Additionally, you may want to change other mortgage details such as the length of amortization (long term vs. short term loan), switch from a variable to a fixed-rate mortgage to better manage your monthly payments or change to a variable rate mortgage for a lower interest percentage and more flexibility.

Home equity options

If you’ve built up equity in your home by regularly paying off your mortgage, you can ‘cash out’ some of that money as part of your refinancing. That being said, there are a few home equity take-out options for you to explore:

  • Home equity loan

A home equity loan involves assessing what you currently owe on your home compared to what’s been paid off to date. The amount left over is your equity, and you have the option to apply for a home equity loan to access some or all of that amount, depending on your other financial obligations and income. Just like any major loan or second mortgage, you’ll have a set interest rate, specified terms and a payment/amortization schedule to follow.

  • Home equity line of credit

Also called a HELOC, this is a line of credit for any of your home’s equity available to you, up to a maximum amount. Like any line of credit, you can access a little, a lot, or none at all until you need it. A HELOC doesn’t have a strict payment schedule, but you will still pay interest on any amount you owe, which is usually determined by a variable or fluctuating interest rate.

  • Canadian Home Income Plan (CHIP)

Another way to access your home’s equity is through a CHIP reverse mortgage. This specialized plan was developed for homeowners who are 55 years of age or older who can borrow up to 55% of their home’s value. What makes this plan unique is that you don’t actually have to pay off the loan until the home is sold. The interest on the CHIP loan will accumulate and get paid along with the outstanding loan and mortgage amounts when the house sells. Keep in mind however, that the convenience of not making interest or loan payments is offset by agreeing to higher interest rates. Another feature of a CHIP equity loan is that it is easier to apply and get approved for than other loans. Essentially, your current income or debt load is less of a concern because what matters most is that your home’s value has been assessed at and that this loan is a sound financial investment for CHIP lenders.

Choosing between these refinancing and home equity take out options all depends on you and your current financial situation. That’s why it’s always important to talk to a certified, accredited professional to find a mortgage solution that works for you and your unique circumstances. If you’d like to learn more about your mortgage refinancing options, connect today and let’s talk. Just call (705) 315-0516 to book your appointment; you’ll be glad you did!

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