What’s refinancing?

By Andreia Guariento. Mortgage Broker Specialist and licensed to work throughout Canada / www.andreiabrazil.com / Facebook: Andreia Brazil Mortgages

Refinancing is a strategy that allows you to take some cash against your property. If you have a mortgage of $200,000.00 and you need an extra $100,000.00, you can refinance your mortgage, take out the cash and your new mortgage amount will be $300,000.00.

It is very important to understand that you can only refinance your property if you have at least 20% equity in it. The amount of equity in your property is based on the market value of your property minus the current balance of your mortgage. As a simple example: consider a market value of a property at $500,000.00 and a mortgage on it of $400,000.00. The difference of $100,000.00 is the amount considered as the equity of the property.

If you have exactly 20% equity on the property you can renegotiate your mortgage terms but you won’t be able to take any money from it. If your equity is more than 20%, you can consider taking cash out. Essentially, the bank will not let you touch the 20% equity. If there is more than 20% equity, the bank will allow you to take the difference. Suppose you have 30% equity in your home, the bank will let you borrow 10% of the equity and will add it to your new mortgage.

Why do people refinance their properties?

People refinance their property for many reasons. I will explain the most common reasons why people do it.

1) Refinancing for a better interest rate – If you have a high-interest rate and the market is offering a lower rate than what you have, you can refinance your property with a different bank that is offering a better rate, however, you can only do it if you have at least 20% of equity on the property.

2) Lowering the monthly payment – If you bought your property with less than 20% of down payment your amortization was 25 years. When you have 20% of equity or more, you can refinance your property and extend the amortization from 25 years to 30 years, doing this, your monthly payment can come down considerably. A lot of people use this strategy to help them with their budget.

3) Home improvement – When people own a property that has more than 20% equity on it, they can refinance their mortgage to use the money towards home improvements. This is a fantastic strategy to increase the market value of the property.

4) Invest in other property – this strategy is used by people that like to invest in real estate. When you have more than 20% equity on the property, you can take part of this equity and use it as a down payment on the next property.

5) Paying off debts – If you own a house and there is more than 20% equity on it, you can take some of this equity and eliminate the high-interest accounts that are eating you alive. You will save a lot of money and balance your monthly budget. The interest rate on your new mortgage is most often than not lower than the other debts you hold.

6) Better banking services – If you have 20% equity or more on your property and you don’t like the bank that you have your mortgage with, you can refinance and take your mortgage to another bank.

7) Adding or removing people from the mortgage and from the title of the property – the only way to add/remove people from the property’s title and from the mortgage, is to refinance. If you are removing someone from the property, you must qualify for the mortgage on your own.

8) Refinance to invest – A lot of people take the equity from the property to invest the money for higher returns. Example: Your mortgage interest rate is 3.5% and you put your money in an investment that is paying 6% return.

9) Other common reasons – People also take the equity from their property to fund a child’s education, purchase a car, travel, pay for medical treatment, etc.….

People ask me when the best time is to refinance. Review your contract and terms to determine the most strategic time to refinance and understand your wants/needs to decide when to refinance.

Some expenses can wait and are not worth a possible penalty for breaking your current contract. Other situations require immediate attention and the benefit of refinancing outweighs any cost you may incur.
Remember that you will have to qualify for the refinance just as you did for your first mortgage. Income, credit store, debt situation will all determine your ability to get the refinance. The refinance will be determined based on the current rates and regulations of the industry.

One final thing about refinancing your property, if you purchase a property with 5% down payment, you will have to wait for the market and your property to build a minimum of 20% equity before you are able to refinance.