Access to mortgage refinancing or equity take-outs are one of the key reason’s investors cite real estate as a great investment. Very simply, mortgage refinancing is replacing an existing mortgage with a new, larger (and/or longer) mortgage. Crazy, right? But there are legitimate reasons why refinancing your mortgage may make cents (pun intended!). These include:
- Pay off existing debt via debt consolidation,
- Taking advantage of a lower mortgage rate,
- Lowering your monthly mortgage payments via extending your mortgage’s amortization, or
- Access funding, for example, to:
- Purchase another home,
- Perform an existing home renovation,
- Pay for your children’s education/wedding, or
- Pay for a major purchase such as a dream vacation.
It is important to remember that in both a mortgage refinance or an equity take-out, a homeowner can usually borrow up to the difference between the current mortgage balance and 80% of their home’s current appraised value. Depending on the lender and the purpose for the mortgage refinance, refinancing can be a:
- Home equity line of credit (HELOC),
- Second mortgage, or
- New mortgage altogether.
Homeowners generally prefer to use a mortgage refinance over other sources of financing because mortgage refinancing often results in the lowest cost of financing available.
A mortgage refinance can be performed either during the term of your mortgage or at renewal. If your mortgage is not fully open (very few are), refinancing during the term will result in a prepayment penalty. Even after paying the prepayment penalty charges, a mortgage refinance may still end up saving you several thousands of dollars in interest payments!