Financing
Everything you need to know
Whether you are consolidating debt, renovating or improving your home, combining mortgages or renegotiating your mortgage, refinancing is a viable option that can save you money.
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 80% of the value of your home,without high ratio insurance, and you qualify in terms of income and credit standing, refinancing your first mortgage should be a breeze. Consolidating credit card debt using equity on your home is also a great way to beat high credit card interest rates.
Another option is to obtain a second mortgage. This type of mortgage ranks behind your current first mortgage in priority of payments. This means that if the mortgage was to go in default and the lender forecloses, the first mortgage holder gets paid ahead of the second mortgage holder. The second mortgage holder takes a much higher risk compared to the first mortgage holder.
Because of the higher risk, the interest rate on a second mortgage is significantly higher than traditional mortgages. In addition, a mortgage brokerage fee may be involved in the transaction. Despite the higher interest and fees, a second mortgage can be an economical alternative in certain cases. With a second mortgage, the borrower does not have to break their existing mortgage, thereby saving pre-termination charges.
Home Renovations and 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! Maria can advise you through this process. Mortgage insurers 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.
Not all improvements are eligible, however. Pools and spas are typical “over-improvements” which may not qualify for a high-ratio equity take-out. 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, regardless of the degree of luxury you plan to add.
Should you renegotiate your mortgage?
You may benefit from breaking your mortgage and transferring the mortgage to another institution. The new institution will generally cover the cost of appraisal and legal fees. They will not cover the cost of pre-payment penalties and the discharge fee (some institutions will allow the borrower to include penalties in the new mortgage, however).
Deciding to transfer and break your mortgage depends on a number of factors: the remaining term, the interest rate on your mortgage, current interest rates, the prepayment penalty and your expectation on where interest rates are headed.
If you haven’t had your mortgage reviewed for some time, it is about time that you did. Maria will be happy to help you quantify the benefits of breaking your mortgage.
