The Powers Of Re-Financing

Life happens, sometimes very unexpectedly. In some cases, you make life happen by planning and taking action. What’s the difference? Unexpected happenings can be things like a basement flood, legal issues, other costly home repairs and other random “acts of God”. These things aren’t typically in the average home owner’s budget and can cause some serious financial pain. Making life happen are the things you plan for or want to do; an investment property for a quick flip, family vacation, sending your kids to school, a new car or whatever else it may be that you so desire. The trick is to do more productive things from the latter so you can one day be better equipped to handle the former. We’ll show you some tips below.

Re-Financing

Whether you planned for it to happen or not, these new expenses cost money – Big Money. With these new developments, this may be a good time to look into re-financing your home and using your equity to benefit you. Seems like a hassle? Well here is a simple breakdown of where to start and what to look at when making this decision. Money borrowed against your home is the cheapest money available. Depending on your situation, you may be able to save hundreds of dollars in interest every month. Here are some things to consider:

  1. How much equity do you have available in your home? What is your house worth and what is the balance of your mortgage? You may want to consider having your home appraised or talking to a knowledgeable real estate agent to help you determine the value.

  2. What kind of mortgage are you in right now? What is the interest rate on it? If it is substantially higher than what is being offered right now, you should really consider a re-finance.

  3. What are the pre-payment terms and penalties on your mortgage? Lenders usually charge a premium to break a mortgage. Typically they will charge you the equivalent of 3 months interest or IRD (Interest Rate Differential) Speak to your mortgage broker or bank to determine what the penalty will be. In many cases, the savings of the new mortgage rate will outweigh the costs of breaking your existing mortgage.

  4. How much credit card debt do you have and what are your plans to repay this debt? If your credit card debt is very high, and your existing mortgage is similar to what is being offered right now. It still may be beneficial to re-finance your home. By doing this, you pay out your credit cards and put that debt into your mortgage. The interest savings by doing this are substantial and this alone can save you thousands of dollars every year.

Debt Amount Credit Card Interest/mnth Mortgage Interest/mnth Monthly Savings Annual Savings
$10,000 $150 $22.41 $127.59 $1,531.08
$15,000 $225 $33.63 $191.37 $2,296.44
$25,000 $375 $56.04 $318.96 $3,827.52

That’s all great, but how does this directly relate to your ability to better handle unexpected financial hurdles. The answer is broken down into two parts; direct and abstract.

Direct:

The simple form of the two answers. By re-financing your mortgage into a better position and either saving money on your mortgage or credit card payments, you spend less each month and directly put more dollars into your bank account – Pretty simple concept.

Indirect:

Slightly more complicated at not suited for all, however when done properly these can be a game changers. This is the art of taking equity out for the purpose of investing, which is obviously quite different than removing equity from your home to pay out debt. In lament terms, this is the double down. Most Canadians don’t accumulate enough dough to go out and buy another property; they’re too busy keeping up with their existing mortgage. However, there are many home owners with enough equity to make their money dance for them. With so many flexible mortgage solutions available, it is not a stretch to be able to take some cash out from your home and use it as a down payment/working capital on an investment property. A lot of home owners are banking their equity as their retirement plan, and rightfully so. But if the calculations add up and you are game for a little risk, it may be worth looking into adding a few extra bucks to that stack. There are many avenues you can investigate for this; there is not simply a cookie cutter investor strategy that works for everyone. Here are just a couple:

  • Purchasing a Rental Home – If you do not want to be too exposed to the market, this can be a good option for you. Let the Renters help you pay down your mortgage while the home value increases. A few years down the road you’ve built yourself a nice little nest egg.
  • Purchase a home to renovate and sell – Although rewarding, this can be tricky and very stressful. You will need to first find the right property in the right area. You’ll need a bankroll to finance the project. Then you will need either a lot of time couple with an understanding of basic construction and design to manage the project yourself, or additional money to hire a general contractor to take care of it for you. Make sure you speak to the right people (make a link) and do the proper research before taking this on.
  • Invest in mortgage lending – Private lenders are an integral part of the mortgage industry. They range from major lending firms to individual people with some extra cash. Investing in private mortgages can be a great way to collect residual income. To get more information, speak to a Mortgage Broker in your community as they will be the ones who will be helping you lend your money out in a safe and legal way.

These are just 3 of many ways to use the equity in your home as a means of making more money. Full disclosure: We advise that you speak to professionals before involving yourself in any of the above. Although potentially rewarding, there are inherit risks associated with all of these. Make sure you fully understand those risks and follow proper procedure before YOU make the decision to invest.

There are many scenarios to go over and obviously, many variables to calculate. If your debt is racking up or you feel you are not in the best mortgage situation available to you. You should get in touch with your broker or do some research at home and go over some different options and calculations. If you are able to save on interest and put more money in your own pocket month after month, what reason would you have not to? Use your home as a tool that works for you; take control of your mortgage.

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Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (877) 335-4486.

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