Refinancing can make a lot of sense for homeowners. At other times, it may make more long-term sense to stay with your current loan. With interest rates at historic lows, many people are thinking of refinancing to lock in lower rates. While that is the most popular reason why people refinance, it’s important to decide what you want your refinancing to accomplish before you go about figuring out the best way to do it.
Top Reasons to Refinance
After all, refinancing doesn’t pay off your debt, it’s just restructures it. Three of the most popular reasons for refinancing include a lower, more stable interest rate; debt consolidation; and home equity access.
Refinancing for a lower interest rate can translate into significant savings over the life of your mortgage, but you need to factor in any penalties. If you have a variable rate mortgage, the penalty could be as much as three month’s interest. If you have a fixed mortgage rate, the penalty is typically the greater of three months interest or the interest rate differential penalty.
With many expecting the Bank of Canada to raise interest rates later this year, borrowers who want a stable monthly rate may also want to consider refinancing from an adjustable-rate mortgage to a fixed-rate loan; higher interest rates will negatively impact variable loans. Refinancing from a variable loan to a fixed loan might not get you the lowest rate, but it will give you a stable one.
If you’ve lived in your home for a number of years and have built up equity, you can refinance your loan to pay out higher interest debt. The interest rate on a car loan, credit cards, a line of credit, or other debts will be higher than what you would pay after refinancing. Consolidating debt through refinancing also means you only need to make one simple payment.
Many homeowners refinance their mortgages to access home equity and free up cash for home renovations, children’s education, investing—anything, really. By refinancing, you can access up to 80% of your home’s value (less the mortgage).
Top Ways to Refinance
A home equity line of credit (HELOC) is one of the most popular financial tools homeowners use for refinancing. With a HELOC, homeowners can unlock up to 80% of their home’s value. Keep in mind that the outstanding mortgage loan balance and the HELOC cannot equal more than 80% of the home’s value.
Unlike a typical loan, where you get the total sum up front, with a HELOC, the money is available, but you only use what you need to. On top of that, you only pay interest on the amount you withdraw.
The interest charges on a HELOC are calculated at a variable rate plus the prime rate. The variable rate can vary drastically depending on which lending institution you use. For instance, some banks will also only hold a particular rate for anywhere from 30 to 120 days.
A home equity loan sounds similar, but operates differently than a HELOC. A home equity line of credit, sometimes referred to as a second mortgage, operates the same way as your primary, or first, mortgage does; it’s used for a specific amount and is repaid with fixed monthly payments.
The benefit of a HELOC is the interest rate. The interest rate is lower than a credit card or other unsecured loans because your home is used as collateral.
Canadalend.com: Your #1 Choice for Refinancing
If you’re thinking of refinancing your home mortgage and want to know more about the different options, contact Canadalend.com or apply online . The independent, licensed agents at Canadalend.com will help you evaluate your current financial situation and decide which products are best for you.