When it comes to paying off debt, you have a few options to choose from. You can cut your expenses down, make more money, get a debt consolidation loan, and more.
But if you’re a homeowner in Ontario today there is a good chance that the equity in your home has increased considerably in the last few years and that means refinancing your mortgage may be a great option for you.
Following a steep run-up in home prices in most major markets in recent years, certain markets, particularly the GTA, experienced a slight correction—or at least pause—in 2017.
But things look to be modestly stabilizing, as seen in the Toronto Real Estate Board’s January statistics, and that’s good news if you’re considering refinancing your mortgage.
As the value of your home increases, so too does your available home equity.
Let’s say you bought your home in 2012 for $400,000 with a 20% down payment. That means you got a mortgage of $320,000 and you effectively owned 20 percent of the home at that point.
Every payment you’ve made since then has paid down a certain amount of the principle of that mortgage and increased the amount of equity/ownership you have in that property.
Let’s say you’ve paid off $100,000 of your mortgage, now you have $220,000 left on the mortgage, but what about the value of the home?
Well, depending on your local market, your home is probably worth a lot more now.
If your home’s value increased by an average of 4% each year (not unreasonable, especially in some of the hotter housing markets), your home is worth around $506,000 at this point.
That means you have about $286,000 of equity in your home to tap into.
TIP: You can use this refinance calculator to determine how much equity is available to you.
That’s a significant difference, and it gives you options—one being the ability to refinance your mortgage and take some equity out of your home to pay down your unsecured debt.
But before you refinance your mortgage, there are some important considerations that you should keep in mind.
1. The terms of your mortgage will change
Refinancing your mortgage and tapping into your home’s equity will increase the amount you owe. If your mortgage is $300,000 now and you want to pull $100,000 out of your equity to consolidate a second mortgage or some credit card debt you’re carrying, your mortgage will jump to $400,000, as will the interest you owe.
To cover this, one of two things will happen: you’ll either have to increase your monthly payment or lengthen the amortization (or a combination of the two).
TIP: Use this calculator to see what your new mortgage payments would look like after refinancing.
You will have to look at your finances and crunch the numbers to make sure it makes sense to refinance your mortgage. But if you’re taking high interest debt and moving it to a lower interest rate, that’s often a good financial move.
2. You’ll have to re-apply
A refinancing of your mortgage results in a new mortgage, so you’ll have to produce all the documentation your bank or mortgage broker requires to approve you. This will include a check of your credit score, income statements and other personal financial records and, if you own a business, your company’s financials as well.
The less equity you plan to access, the easier this process will be. But you will still have to demonstrate that you’re able to manage the new debt you’re taking on.
And that includes the mortgage stress test that was introduced earlier this year.
Read More: What The Stress Test Means For You
This brings us to the most important consideration:
3. Don’t bother with refinancing your mortgage if you plan to rack up more consumer debt
If you’re going to go through the process of refinancing your mortgage to eliminate a high interest second mortgage or pay off your credit cards, don’t fall back into the bad habits that created the problem in the first place.
You should be using your home equity to improve your financial situation, not dig you even deeper. Other than eliminating high interest debts, your home equity should be used for:
- Renovating your home in a way that increases the home’s value.
- Learning a new skill that will make you more valuable.
- Investing in another property that will grow your monthly income.
These are all great reasons to tap into your equity. If you’re ready to book your free mortgage refinance consultation, click right here and a dedicated mortgage agent will reach out to you.