Borrowing Against Home Equity
IMPORTANT: Borrowing against home equity is also a Plan "A", because this is a mortgage and the only difference is the purpose, some mortgages are to buy a home or to invest to purchase a property, while refinance is to take advantage of the home equity that we already have in our property, and the objective is to take out that cash to invest, to consolidate debts, or to use that cash for different needs. This is a smart desition, because is cheaper than credit cards or other loans.
Reasons to Refinance
If you’re looking to take equity out of your home or save money on interest payments, refinancing your mortgage could be the right option for you. Here we’ll show you how to determine if the benefits of refinancing outweigh the costs when accessing home equity, when getting a different mortgage with a lower interest rate, or when consolidating your debt. Visit the pages below to see if refinancing can help improve your financial situation.
Refinance your mortgage to access home equity
Your home equity – your home’s value minus the balance of your mortgage – is available for you to withdraw and invest in a number of ways, including home renovations, invest to purchase a second, a vacation or a rental property, afford the post secondary education needs, and much more. You can access up to 80% of your home equity by increasing the value of your mortgage through a refinance.
Other options to access home equity
In addition to a mortgage refinance you may also want to consider a home equity line of credit (HELOC) or second mortgage. There are key differences between each loan which we will now outline. A refinance is essentially a ‘re-mortgage’ and allows you to, therefore, access the same interest rates as a traditional mortgage, while a HELOC’s rates are slightly higher than their variable rate counter part. Further, unlike a refinance, with a HELOC all of the funds are not advanced upfront. You can withdraw as you please and only pay interest on the amount you take out. You are also not subject to a refinance penalty.
As a third option, you could look into a second mortgage, which may allow you to access more than the 80% loan to value ratio offered through a traditional refinance or home equity line of credit product. Second mortgages are almost accompanied with a much higher interest rate, are not offered by all lenders and thus are less popular.
Looking at all three options, you can see there are many factors to consider and the benefits must be weighed against the costs.
It is best to speak to a qualified mortgage professional who can help you evaluate your equity refinance options.
Refinancing Calculation Example
To understand the math behind determining your available equity please consider the following example:
Home value $350.000
Current mortgage $100.000
Step 1: Calculate maximum refinance
$350,000 home value (X) 80%
= $280,000 dmax refinance
Step 2: Calculate available refinance
$280,000 max refinance (-) $100,000 current mortgage
= $180.000 available equity