(Photo credit: Wikipedia)Happy holidays everyone! It is once again the time of year for celebrating family, decorating the tree, and overspending. I’m going to extrapolate on my newsletter topic this month and discuss the options available for consolidating all that Christmas debt by refinancing your mortgage.Of course it goes without saying that there are many conceivable reasons to refinance your mortgage such as renovating your home or lowering your payments to account for a layoff or one parent staying home with the new baby, etc. It’s best to plan to do this at renewal time so you’re not paying penalties for getting out early but sometimes it’s worth paying just for the lower interest rate. With current rates still being at historical lows, now is the time to get your Edmonton mortgage broker to calculate the costs and benefits of refinancing.
There are a number of alternatives available such as an Equity Take Out which is just borrowing a larger sum than you currently owe. A Blend and Extend is borrowing additional funds from your current mortgage company and extending your amortization mid-term. Also available is a Home Equity Line of Credit (HELOC) which comes in different forms but is incredibly flexible.
An Equity Take Out frees up cash for consolidating debts (which are then excluded from your debt ratios, so you qualify for more) at a much lower rate than your credit cards. This is the most common form of refinance and can also be used for renovations, to buy a vacation home, as a down payment on an income property, or just about anything. Another option is to extend the amortization to lower payments. Another still is to convert your mortgage into a line of credit with interest only payments. This drastically lowers your payments and allows you the freedom to only pay for what you borrow and of course there are no penalties for making extra payments (although there may be a penalty for discharging the mortgage early). Carrying your whole mortgage on a Home Equity Line of Credit is risky from a personal finance standpoint as you have to be disciplined enough to make the extra payments or you will never pay off your home but it definitely is the winner regarding flexibility.
There are two different types of HELOCs. The first is just a regular line of credit which is registered on title like a second mortgage. This type works basically the same as a secured credit card. The second kind is called an Automatically Re-advancing Mortgage and is a combination of a regular mortgage and a line of credit (they sometimes have other components as well such as a Visa). Only a few institutions have this product and they all differ a little. The commonality is that they all get registered on title for up to 80% of the value of your home as a first mortgage, your current mortgage gets replaced with another mortgage component with principle and interest payments and the balance is available on the line of credit with interest only payments. As you pay down the principle on your mortgage, that money becomes available on the line of credit so you always have access to 80% of the value.
Of course another benefit of any type of refinance is a lower interest rate. If the payout penalty is not prohibitive then it may be in your best interest to refinance solely for this reason. You can call your mortgage holder any time and ask what your payout penalty would be to find out the feasibility. Payout penalties come in two forms. One is the basic three months interest. The second is the Interest Rate Differential (IRD) which can cost you dearly if rates have dropped or if you have a lot of your term outstanding. The IRD is calculated by figuring out the difference between your mortgage rate and current rates and multiplying that by the remainder of your term. In other words it’s how much the bank is going to lose by having to reinvest their money at a lower rate. Every institution calculates their penalties differently so you need to talk to them if you’re thinking about discharging your mortgage early.
Payout penalties is one reason to opt for shorter terms on your next mortgage so that once each year you have the flexibility to make necessary changes that you may not be able to foresee. I personally like the strategy of one year terms. You can enjoy rates that are much closer to Prime and avoid the big penalties associated with longer terms.
If your payout penalty is too great to refinance, another option that may be available to you is to apply for a Blended mortgage with your current mortgage holder. A blended mortgage offers you the opportunity to take out equity and extend your amortization without paying out your old mortgage. Your mortgage company will advance additional funds to you at the current rate and blend that with the old rate on the original balance. You don’t get full advantage of lower rates but you don’t have any penalties to pay. If your mortgage was CMHC insured and you are borrowing enough to put you back into the high ratio category (over 80% Loan to Value) then you will only have to pay insurance fees on the additional balance.
So if you’re feeling the credit crunch or have some renovations planned for the winter months then talk to your Edmonton mortgage broker about finding the best refinance solution for you and sleep easier in the New Year.
For more information, contact me anytime at (780) 996-2655 or tmacmillan@dominionlending.ca. Please visit my new website at http://www.edmontonmortgagebroker.biz/. Merry Christmas!
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