Even if you don’t follow the news lately, you will know your home value has increased drastically over the past several years. With historically low interest rates, you may be wondering how you can tap into your equity and use it for many different reasons such as:
In order to access your home equity, you have several options. You could break your existing mortgage and begin a new one, obtain a Home Equity Line of Credit (HELOC), blend-and-increase your current mortgage, or consider a second mortgage.
1. Breaking Your existing mortgage - you’re paying off your current mortgage and setting up a new mortgage with new rate and term. This could be with the same lender or a different lender. You can access up to 80 per cent of the equity in your home. At closing, you can use some funds to pay off unsecured debt, and the rest of the funds you will receive in the form of lump sum in cash. Many lenders limit the “lump sum” you will receive as a cash to $200K. There are some exceptions obviously. If you are planning an extensive renovation, a construction draw mortgage is the better fit. Depending on your current mortgage product, and if you are switching lenders, there are other fees and costs to consider when breaking your current mortgage, such as a penalty for ending your mortgage contract early and discharge fees. 2. Home Equity Line of Credit (HELOC)- A HELOC is a secured line of credit also registered as a charge against your home. This charge can be in first position but generally is added after the fact behind a conventional mortgage. Some lenders will not permit another charge on title. Like any line of credit, a HELOC is fully open and you can borrow and re-borrow. The interest rate is tied to Bank Prime and may fluctuate. Government regulations stipulate that a HELOC cannot exceed 65% of the value of your home, unless in second position, in which case you can borrow to 80% of the value and qualifying must be done using the 5 year posted rate (4.64%) with a 25 year amortization. Payments can be as low as interest only but personally, I consider this option the never-never plan for repayment. Any increase in interest rates can throw off the most budget conscious borrowers. 3. Blend and Extend Your Current Mortgage - with this option you are increasing your existing mortgage with your existing lender. Your lender will calculate a “blend” of your existing mortgage rate and the current interest rate for the term you’re agreeing to in order to establish your new rate. There are typically two options:- Blend & Increase to the End of the Term - this refers to the new money having a renewal date that matches and coincides with the existing mortgage renewal date . - Blend and Extend to New Term ( most common, and easier to qualify for) - the term of the new money being longer than the existing term, and so extending the existing term out. In other words, you are locked in with the same lender for another term. 4. Second Mortgage - bad things happen to good people, and if ,for some reason, you had some recent blips with your credit, or your income has dropped significantly, your only option to access equity in your home (without selling) is through a second mortgage. It is a bit more expensive in terms of rates and fees, however it could be a great temporary solution until your current situation improves A lot of people are surprised to find out the hard way that some mortgages are completely closed, and cannot be broken, even with paying the penalty, unless there is a “bonafide sale” of the property. This means that you have no choice but to keep your existing mortgage and potentially:
Ultimately, it is best to consult with an experienced mortgage professional whenever you are thinking of getting a new mortgage or breaking your current one. Let the math and numbers show you whether it makes sense to make a change. A good broker will offer solutions and strategies through showing the numbers in a way that may have not occurred to you before! Give me a call at 647-893-2535 or email me at [email protected] to explore your options. Sign Up Here for Monthly Mortgage Updates
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