Why Would You Refinance?
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Why Would You Refinance?
Welcome to Asking for a Friend. Let’s see who could use some financial advice today.
Dear Asking for a Friend,
My neighbour was talking about refinancing her home so she can borrow more money to build an extension, and it got me wondering...what exactly IS refinancing and why do people refinance?
Sincerely,
Next Door Nancy
I hear you, Nancy. First, what is refinancing?
Refinancing means renegotiating your existing mortgage loan agreement, usually to use any available equity in your home.
So what does that mean in real terms? Let's say the value of your home is $500,000.
Super: $500,000
80% of home value → 0.8 x $500,000 → $400,000
Outstanding balance of your mortgage →$300,000
How much you can borrow → $100,000
Subject to the bank's approval, you could borrow up to 80% of the value of your home (up to $400,000 in this example) less the outstanding balance of your mortgage.
That means if your home is worth $500,000 and you have an outstanding balance of $300,000 on your mortgage, you may be able to borrow an additional $100,000 ($400,000 - $300,000).
So WHY do people refinance?
Super: To consolidate debts.
Say you have a few different debts, like credit card debt and payments on a car and the interest rate for each of these debts is higher than the interest rate on your mortgage. If you’re able to refinance your mortgage, you can then use the money from the refinancing to pay off these debts in full. The amount of your mortgage payments will increase to cover the new principal amount but you will have only one payment amount to make each month which may be less than the 3 original debts.
Super: Provide flexibility to pay for big ticket items.
Whether you want to finance a home renovation or need money for tuition or want to buy a car, refinancing your mortgage can give you the flexibility to access the funds you need.
So, there are different reasons to refinance a home, but the factors are different for each person’s individual situation. That’s why it is a good idea to get mortgage advice to help you determine what’s best for you.
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