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Refinance Your Mortgage or Use Your Home Equity?

Posted by Amanda Smith on August 18, 2021

Should I refinance my mortgage?

If interest rates have dropped since you signed your mortgage, you might think about refinancing. But before you take the leap, there are a few things to consider. When you refinance your mortgage, you replace your existing mortgage with a new one on different terms.

To find out if you qualify, your lender calculates your loan-to-value ratio by dividing the balance owing on your mortgage and any other debts secured by your property into the current value of your property. If your loan-to-value ratio is lower than 80%, you can refinance.

The lender also looks at your monthly income and debt payments. You may need to provide a copy of your T4 slip, notice of assessment or a recent pay stub; your mortgage statement; a recent property tax bill; and recent asset statements for your investments, RRSPs and savings accounts.

What are the benefits of refinancing mortgage?

Get a lower interest rate

If mortgage rates have dropped since you received your loan, you’re in luck. You can take advantage of reduced interest ratesOpens a popup. — and lower monthly payments — by refinancing your mortgage. Refinancing your balance with a lower interest rate is called rate-and-term refinancing. Even a slight reduction in the interest rate can lower your monthly payments.

Consolidate your debt

Thanks to lower interest rates, refinancing can free up cash to help you pay off high interest credit card debt. When you exchange your existing mortgage for a larger loan and take the difference in cash, it’s called a cash-out refinance. You can use this cash to help pay off your debts. You need at least 20% equity in your home for a cash-out refinance.

Change your term or get a different mortgage

Sometimes your needs change and you may have to pay off your mortgage faster or switch your mortgage type. If you get a bonus at work and want to put it towards your mortgage, consider refinancing into a term with more prepayment privileges, such as an open mortgage. Or, if interest rates have dropped, and you plan to stay in your home for the long haul, you can refinance to a fixed-rate mortgage to lock in the lower rates.

Tap into your home equity

When you make payments on your mortgage, you build equity in your home. Your home equity is the difference between your property’s market value and the outstanding balance of your mortgage plus any other debts secured by your property. If you need funds, you can refinance your mortgage to access up to 80% of your home’s appraised value in cash.

How do I use my home equity?

If you want to put your home equity to work, you can refinance your mortgage, get a home equity loan or line of credit (HELOC) to:

Pay for a major home renovation

Replacing a roof, faulty wiring or plumbing are costly. If you need help paying for kitchen upgrades, a bathroom renovation or other repairs, you can use your home equity to help cover the costs. You’ll get the upfront benefit of the finished project and pay the bill over time.

Make a big purchase

Receiving a hefty tuition bill shouldn’t make you panic. To cope with life’s major expenses, such as your kids’ education or emergency situations, you can access funds through a home equity refinance package or line of credit.

Maximize your investments

Is tax season coming up and you want to maximize your RRSP contributions? Tap into your home equity and borrow additional money on your mortgage to use towards your savings.

What are the risks and costs of refinancing?

Make sure you factor in fees before you decide if refinancing is right for you. You need to pay appraisal costs, legal fees and possible prepayment charges. If you switch lenders, you may have to pay a discharge fee. Also, be aware that taking out home equity comes with risks. For example, if you switch from a fixed-rate mortgage to a variable-rate mortgage, you may deal with rising interest rates and higher monthly payments in the future.

TD Bank, CIBC, RBC, Scotiabank, BMO, HSBC Canada

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