It’s likely that you’ve read and heard a lot about refinancing your mortgage to get a better deal. Can you refinance a home equity loan since it is essentially a second mortgage? The quick response is yes. A home equity loan might be refinanced similarly to a first mortgage. Here are the details and how it functions:
Can a home equity loan be refinanced?
You must have enough equity (an outright ownership stake) in your home after accounting for all other loans and mortgages attached to the property in order to refinance a home equity loan. Most lenders demand that your combined loan-to-value (CLTV) ratio be no higher than 85%, which means that the total of your mortgage balances cannot exceed 85% of the value of your home. Even though you already met this requirement when you applied for your home equity loan, you’ll need to do so again if you want to refinance because it’s possible that your home’s value has decreased since then.
You might consider refinancing if interest rates have decreased since you signed your mortgage. a pop-up window. There are a few things to think about, though, before you jump.
When you refinance your mortgage, a new mortgage with different terms takes the place of your old one. Your lender determines your loan-to-value ratio by dividing the outstanding balance on your mortgage and any other debts secured by your property by the current value of your property to determine your eligibility. You can refinance if your loan-to-value ratio is less than 80%.
The lender will also consider your monthly take-home pay and debt obligations. A copy of your T4 slip, notice of assessment, most recent pay stub, mortgage statement, property tax bill, and most recent asset statements for your savings, investments, and RRSPs may all be required.
lower the interest rate.You’re in luck if mortgage rates have decreased since you got your loan. You can benefit from lower interest rates. a popup window. by renegotiating your mortgage. This will result in lower monthly payments. Rate-and-term refinancing means refinancing your balance at a lower interest rate. Your monthly payments can go down if the interest rate is even slightly reduced.
Debt consolidationRefinancing can free up money to help you pay off high-interest credit card debt because of lower interest rates. A cash-out refinance is when you switch your current mortgage for a bigger loan and take the difference in cash. You can use this money to pay down debt. For a cash-out refinance, your home must have at least 20% equity.
When your needs change, you might need to refinance or pay off your mortgage more quickly. Consider refinancing into a term with more prepayment options, like an open mortgage, if you receive a bonus at work and want to apply it to your mortgage. Another option is to refinance to a fixed-rate mortgage if interest rates have declined and you intend to remain in your home for a long time. opens a popup window to secure the reduced prices.
You increase the value of your home by making mortgage payments. The difference between the market value of your home and all current debts, including your mortgage and other loans secured by it, is your home equity. Opens a popup. You can refinance your mortgage to get up to 80% of your home’s appraised value in cash if you need money.
Utilize our home equity calculator to determine your potential borrowing capacity and estimate your available equity.
You can refinance your mortgage, obtain a home equity loan or line of credit (HELOC), or use your home equity to:
Fund a significant home renovation.It is expensive to replace a roof or fix wiring or plumbing issues. You can use the equity in your home to help pay for repairs, renovations, or other expenses like kitchen or bathroom upgrades. You’ll benefit immediately from the completed project and pay the cost over time.
Your reaction to receiving a sizable tuition bill shouldn’t be fear. You can obtain money through a home equity refinance package or line of credit to handle life’s major expenses, such as your children’s education or emergency situations.
Boost your investment returns.
Are you planning to maximize your RRSP contributions before tax season? To contribute to your savings, use the equity in your home to obtain a mortgage loan for more money.
Before deciding whether refinancing is the best option for you, be sure to account for fees. The costs of the appraisal must be paid. opens a popup. Possible prepayment fees, legal fees You might be required to pay a discharge fee if you change lenders. Also, be aware that borrowing against your home’s equity carries some risk. For instance, if you change from a fixed-rate mortgage to a variable-rate mortgage, you might have to deal with future increases in interest rates and monthly payments.
Frequently cited justifications for refinancing a home equity loanThere are a number of valid reasons to refinance your current home equity loan. They consist of:
Make your monthly payment smaller.
Refinancing your home equity loan will frequently mean lower monthly payments. This can take place in one of two ways: either the new loan has a longer term or you receive a better (lower) interest rate.A lower interest rate can be fixed. Because interest rates have significantly decreased, many people are refinancing their home equity loans. The amount of the monthly payment can be significantly altered by locking in a more advantageous interest rate.From an adjustable to a fixed rate, switch.
If the interest rate on your home equity loan is currently variable, switching to a fixed-rate loan offers more security. Instead of a monthly payment that varies depending on interest rate trends, you will have a fixed one. (Inversely, if interest rates appear to be headed in a long-term downward trend, you might want to forgo a loan with a high fixed rate in favor of the variable rate variety.)
Borrow more money to fund projects.
Home equity loans are frequently the most cost-effective way for homeowners to finance these five-figure projects when they are taking on a major repair (damaged roof, broken furnace, etc.) or remodel (renovate the kitchen, add a bathroom). Not only do these loans frequently have lower interest rates than credit cards or personal loans, but when used for home improvements, the interest paid may also be tax deductible.
Create your own repayment terms.
Refinancing gives you the chance to modify the terms of a home equity loan with 10 years remaining on a 15-year repayment term. You can either lengthen the terms to give yourself more time to repay the loan or shorten them to pay it off more quickly.
No. You can borrow money using the equity in your home with a home equity loan, which functions as a second mortgage. It is not a viable first mortgage replacement. A cash-out refinance is an option to consider if you want to refinance your current mortgage while taking advantage of the equity in your home.
Home equity loan refinancing advantages and disadvantages
Reduce your monthly payments: If everything else is equal, you’ll save money overall and on your monthly payments if you can get a lower interest rate.Reduce or lengthen the repayment period: Changing to a longer term, such as 10 years instead of 5, will result in lower monthly payments but higher interest costs. Alternately, you could choose a loan with a shorter term, which would increase your monthly payments but allow you to pay off the debt more quickly, saving you money on interest and giving you more breathing room in your monthly budget.
Prepayment penalty: You might be charged a fee if you pay off your home equity loan early (which is essentially what refinancing does) or before a specific deadline, depending on the type of loan and your lender’s policy.Repayment dangers You expose yourself to the possibility of foreclosure if you are unable to make the payments on the new loan (let’s say you converted to a shorter-term loan with a higher monthly payment).
Likewise, you might not be able to refinance at all if the value of your home drops.Final verdict on refinanced home equity loansYou must submit an application for a refinance of your home equity loan, either with the current lender or a different one, just like you would for a standard mortgage refinance. Be prepared to provide the lender with a list of your assets and liabilities, as well as credit and financial information.