Of Prime Interest: Accessing equity in your home

Using the equity in your home can be a cost effective way to meet that objective.

  • Apr. 5, 2016 6:00 p.m.

Do you need access to additional funds?

Using the equity in your home can be a cost effective way to meet that objective.

Equity is the difference between value of your home and how much you owe the lender. Currently, lenders will allow you to borrow up to 80 per cent of the appraised value of your home when you are refinancing.

So when you refinance a mortgage on your home, you will pay off the original mortgage and replace it with a new one. There is a good chance the new mortgage will have a lower rate than your existing mortgage. You can then use the extra equity (cash) in your home to cover major purchases such as investments, buying additional property, college tuition, taking a vacation or perhaps buying a new vehicle or boat.

Perhaps you need funds to start a business, or wish to use the equity to pay out high-interest debt such as credit card bills, car loans, and unsecured lines of credit.

By consolidating high-interest debt into your mortgage at a lower interest rate, you can save money and simplify your budget by having just one payment. Breaking your contract and paying the penalty for doing so for a lower interest rate can save you money over time.

Another option is to establish a home equity line of credit with a refinance. This will allow you to have ongoing access to funds at a lower interest rate because the line of credit is secured by the equity you have built in your home.

Lenders will allow you to take up to 65 per cent of your home’s value in a line of credit. If you require a refinance to 80 per cent of your home value the remaining 15 per cent can be a fixed or variable rate product.

Keep in mind that you have to qualify for the new mortgage amount and you need to have enough money to cover any related expenses. Every mortgage, including a refinanced one, will have legal fees associated with it.

When you refinance, you may choose to increase your amortization to 25 or 30 years and in some cases 35 years with select lenders.

This will reduce your payment and can be financially beneficial if you are in a season of your life where your expenses are higher. Or if you wish to pay off your mortgage sooner you can reduce your amortization or increase your payment frequency.

 

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