What is Refinancing? (And How it Can Help You Build New Investments and More in 2023)
When interest rates drop, many investors jump at the chance to refinance their properties. But what is refinancing and why is it so attractive?
In short, refinancing is when you trade in an old mortgage agreement for a new one at better rates. This is done by taking on a new mortgage with these new rates and using it to pay off your previous mortgage. Most borrowers refinance their properties in order to lower their interest rates and shorten their payment terms. It is also a method for investors to cash-out on some of the equity earned on their property early.
However, before we dive in, if you want to learn how refinancing a home loan can increase your options as an investor, click the link below for a free strategy call today.
What is Refinancing and What are the Benefits
Lower Your Interest Rate
If you bought your home at a time when interest rates were higher, or the rates have dropped since making your purchase, you may want to look into refinancing. This gives you the opportunity to tap into newly available lower interest rates.
Tap Into Your Equity
Every time you make payments towards your mortgage, you increase the overall equity you have built up in the property. Your equity is the difference the market value of the property and the outstanding balance of any mortgages or debts secured against the property. Refinancing can be a reliable way to tap into that value early, without selling the property.
Consolidate Your Debts
Thanks to the lower interest rates available on your property, refinancing can be a reliable way to pay off high-interest debts such as credit card debt. You can do this by taking out money on top of your mortgage in the form of a cash-out refinance.
Change Your Term or Get a Different Mortgage
Sometimes your circumstances change, and you want to adjust your mortgage to suit them. If you receive a raise or bonus at work and you would like to get ahead on your mortgage, you may want to refinance into something with more room for pre-payment, such as an open mortgage. Or if interest rates have dropped and you plan to stay in your home, you may want to switch to a fixed-rate mortgage to maintain those rates.
Discover How To Apply For An Investment Property Mortgages With This Step By Step Guide
Types of Refinancing
There are two primary types of refinancing: rate and term refinancing and cash-out refinancing. Each refinancing option is good at claiming different benefits, so it is important to consider your goals when deciding what you would like to do.
Rate and Term Refinance
In a rate and term refinance, you are trying to secure a new mortgage at a lower interest rate with a shorter payment term.
Say you have a 30-year mortgage you are trying to refinance after 25 years to take advantage of lower interest rates and payments. You can then lower your payment period to only 15 years by agreeing to pay more each month towards your principal amount, while enjoying the lower interest rate that will save you money in the long run. This is often done by keeping a near-identical monthly payment rate, but it is important to find whatever payment amount is best for you.
Cash-Out Refinance
When doing a cash-out refinance, you are able to receive cash equivalent to 80 per cent of your current value of your home on top on your current mortgage. For example, if you need $40,000 for an upcoming renovation or investment and you own a property worth $400,000 that you owe $60,000. You can take out a loan from your bank or lender for $40,000 in cash-out, making your new mortgage amount $100,000.
In a cash-out refinance, you may not always be saving money with your refinance. Instead, you are refinancing as a method to take out a lower-interest loan than you would get from a traditional cash loan provider. By taking a cash-out refinance, you are committing to either make higher payments or committing to a longer repayment period to pay off the new loan amount.
As well, it is important to know that you will not be eligible to do a cash-out refinance until you have built a minimum of 20% equity on the property.
How to Use Your Home Equity
Refinancing allows you to take advantage of your home equity, but how can you use that equity? Well, some or the things you can do by refinancing and getting a home equity loan or line of credit (HELOC) are:
Pay for Major Renovations
Home renovations can become very expensive, very quickly. If you suddenly need to replace your roof, update faulty wiring, redo some plumbing, or any other repair, there is a high likelihood that you will need a few thousand dollars to do the job, but you may not always have that money on hand. However, by taking out equity from your home, you can allow the value you are naturally building in the property pay for the repairs.
Pay For Education
Whether it is you or your children, refinancing your home and taking out some of your hard-earned equity is a great way to secure a low-interest option to help pay off college/university tuition expenses. However, if you are considering this option, be sure you can afford to pay off the debt that comes with it before you reach retirement. Otherwise, a traditional student loan may be a better option.
Cover Emergency Expenses
While it is always advisable to keep an emergency fund available, it is not always feasible for you to do so. In the event of a medical emergency, car accident or sudden loss in the family, many people find themselves worried about securing the funds to move forward. By refinancing, you can use the equity in your home to pull out the emergency funds you need. Alternatively, before an emergency happens, you may want to pull out some of your equity in order to start an emergency fund, so you have access to the funds faster once they are needed.
Before You Refinance
Before you begin refinancing, you should make sure you talk to your lender and go through your options. Refinancing a property can be expensive, with various fees such as appraisal costs, lawyer fees and prepayment charges potentially coming into play and if you are not careful, you could end up unable to pay your mortgage and lose the property.
So, you need to make sure you are working with an experienced lender who is ready to help you borrow and refinance carefully and responsibly. To get matched with the ideal lender for your situation, visit LendCity.ca today and fill out our online application. Alternatively, click the link below to book a free strategy call with our team at LendCity today.