There are many reasons why you might want to refinance, or increase, your existing mortgage - to consolidate non-mortgage debt, to finance improvements to your home, kids college tuition or investing for retirement. There are many factors to consider when refinancing your mortgage. Here's what you need to know:
Taking out equity in your home
- Consolidate other debt
- Renovations & home improvements
- Investing for retirement
Consolidating existing financing
- Combining mortgages
- Breaking a closed mortgage to transfer to a new lender
Consolidate other debt
Most unsecured debt is priced by your bank at a higher rate than your mortgage in order to compensate them for the higher risk of loss if you default. For many people it only makes sense to use available home equity to pay out this debt, as it typically reduces interest costs significantly. If the total of the existing mortgage and the debt to be refinanced is less than 90% of the value of your home or a maximum of $200K equity take out, and you qualify in terms of income and credit standing, refinancing your first mortgage should be a breeze.
Renovations & home improvements
If you want to spend a significant amount of money on improving your home, you may be able to take out a lot more equity than you realized! The insurers - AIG, Genworth and CMHC, will insure new mortgages which are "topped up" for this purpose, and the total of your current mortgage and the new funds exceeds 80% of the current home value. Of course, if the total requirement is less than 80% of your home's current value, you should have little trouble getting the "top up" you need.
Combining existing mortgages
Where the combined mortgages result in one "high ratio" mortgage: If neither (or none) of the mortgages you're combining was ever insured, but combining them results in a high-ratio situation, you'll be required to pay an insurance premium. You need to look closely at the total savings the combination will give you, in order to determine whether this is financially worthwhile.
In both cases there is one critical consideration which causes the failure of many such refinances. The new mortgage often requires a fraction of the cash flow previously needed to service the now consolidated debt. Many who go through this process not only absorb the cash flow savings into an improved lifestyle - they either re-incur debt that they paid out, or incur debt for which they now qualify - or both. It is important to approach such a consolidation/re-combination of obligations with the clear and focused goal of applying all savings toward paying down the mortgage. Otherwise, the new mortgage will be a burden, rather than a solution.
Breaking a closed mortgage to transfer to a new lender
Many closed mortgages have the feature that allows the balance to be paid out with a penalty after a certain time has elapsed on the mortgage. Check the "prepayment" clause in your mortgage to determine your own situation, or better still, call your institution and ask them the cost of paying out in full.
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