What is a refinance?
A refinance is when you pay off your existing mortgage and replace it with a new mortgage. The new refinanced mortgage may have a larger balance, with a different rate, term and/or amortization.
Why do people choose to refinance their mortgages?
There are many reasons why some people choose to refinance their mortgage
. Some reasons include:
Emergencies or life expenses
- Accessing Equity in the home for things such as Home improvements, debt consolidation and expenses such as weddings, medical bills, school tuition etc.
Lower mortgage payments
- If cash flow is an issue, some consider lowering their mortgage payments to live with more financial flexibility. However, this results in paying more interest over time.
- Some investors use the equity in their home to invest in the stock market or to buy rental properties.
Regardless of your reasoning to refinance, it is recommended to consult your wealth manager and mortgage advisor to determine the best option for you.
How can I refinance my mortgage to pay for renovations?
A home becomes a major investment when you become a homeowner. Home renovations are also a large part of homeownership, but fortunately you have options when it comes to getting funding for renovations. One great solution for those who want to make renovations to their homes is to refinance their mortgage. Refinancing is when you pay off your existing mortgage and replace it with a new mortgage. The new refinanced mortgage may have a larger balance, with a different rate, term and/or amortization. You can opt for a shorter amortization as long as your income and affordability permits it. The maximum your amortization can be is 30 years. It’s important to note that your ability to refinance will be limited to the built-up equity in your home. You can build equity by paying down your primary mortgage; the more you pay off your home’s principal balance, the more equity you’ll have. You will also build equity if your property value increases. Lenders will typically lend you up to 80% of your current property value.
You bought a house 10 years ago for $500,000, with a mortgage of $400,000, a 3% mortgage rate and 25 year amortization, resulting in monthly payments of $1,893. Now your home has appreciated and is now worth $1,150,000 and you have a mortgage balance of $275,000.
You would like to refinance your mortgage and take out $150,000 to do renovations.
Your new mortgage is now $425,000 with a 1.84% mortgage rate and a 30 year amortization, resulting in monthly payments of $1,788. This means you now have $150,000 to do your renovations, whether it’s a bathroom renovation or kitchen remodel, and your monthly payments have gone down.
Another important thing to note is that if you’re early in your mortgage term, you might have to pay some penalties if you choose to refinance. If you time a refinance close to your mortgage renewal date, you might be able to avoid paying penalty fees.
Are there benefits to renovating my home?
Not only will you be able to build out your dream home and renovate it the way you like, home improvements do have other benefits. Renovations and improvements can
- Increase functionality of your home
- Reduce energy costs through home improvements
- Increase property value and could make your home more appealing to potential buyers if you ever decide to sell
Is it a good idea to refinance my mortgage to pay for renovations?
Refinancing is a great option for those who want to pay for renovations because of the potential 30 year amortization which can result in lower monthly payments and possibly provide better rates
. Other options such as personal loans, tend to have short amortization periods and can have substantial effects on your financial position, especially if finances are tight to begin with. It’s best to work with a trusted mortgage partner to understand the different ways you can leverage your mortgage before you make any major decisions.
How do I start the process of refinancing for my renovations?
You will need to see how much equity you have available through your current property, which will help you set a budget for your renovations. Having a renovation budget is important so you know exactly how much you will need in order to get the job done. It’s best to consult your mortgage advisor and understand how much you will need and how much you can afford.
In order to refinance, you will need to break your mortgage
, this involves renegotiating the terms of your mortgage before your renewal and maturity date.
1. Confirm the costs
When you break your mortgage early, you will most likely incur penalties. Talk to your mortgage advisor or use our mortgage penalty calculator
to run different scenarios and get an estimate before confirming with your lender. It’s important to note that this number might change and won’t be finalized until a payout statement is requested.
2. Determine your options
In this step you will need to review everything with your mortgage advisor. Your mortgage advisor will help you consider all of your options, including your current lender or with other lenders.
3. Make an informed decision
It’s important that you follow through with steps 1 and 2 before making a decision. Some lenders will try to get you to stay with them at a high rate by waiving the penalty fees. Work with your advisor to find a rate that is beneficial for you, as there are options that might be able to cover your penalty and give you a better rate.
4. Submit a mortgage application
This application process is almost the same as when you purchased your home, however it is much simpler. All you would need are the basic income documents and your current property statements.
Renovations can be overwhelming but with a plan and budget in place, your dedicated Perch mortgage advisor can help you through the process. Sign up
for a Perch profile to get started today.