Hey Guys!
This kind of “how-to” email is not typical from me, but I thought this would help some folks.
The easing of monetary policy, in response to the pandemic, was a major contributor to asset values increasing (I.E., your home).
With monetary policy now tightening, I wanted to present an example of how accessing home equity can help overall finances (where applicable).
Accessing home equity can improve overall monthly cash flow, consolidate all liability payments into one, and reduce overall rates of interest.
Let’s chat about the following to keep this simple, yet informative:
1. What is a refinance?
2. Refinance example.
3. How is a refinance completed?
What Is A Refinance?
A refinance requires the following criteria:
A) You own your home. I can’t refinance a property the applicant is renting :-).
B) Your Mortgage blance is less than 80% of the value of the property. To find this loan-to-value ratio simply divide your Mortgage into the estimated market value of your property. IF the decimal number is less than 0.80, there is “room” to refinance.
C) You qualify for the refinance Mortgage amount requested. When applying for a refinanced Mortgage, the lender will want to verify your Mortgage application again (income, credit and home value).
A refinance is changing one or more of the following criteria of a Mortgage 1) amount and or 2) amortization. Basically, a refinance is changing the Mortgage (amount or amortization) for the applicants benefit.
I hope the above is simple enough. Now let’s run through an example together …
How To Refinance A Calgary Home: Example:
When refinancing, the new Mortgage amount is increasing—up to a maximum of 80% loan-to-value. The new Mortgage pays back the old/existing Mortgage with the remaining balance from the new Mortgage being earmarked for some benefit to the applicant.
Common reasons for a refinance are 1) debt pay down 2) home improvement, 3) investment and 4) spousal buy outs.
Let’s review a scenario:
Home value: $550,000
Current Mortgage: $375,000
Personal debts: $25,000
Planned home renovation: $20,000
The applicants would like to request a new Mortgage of $420,000. Here’s why:
Mortgage: $375,000
Personal debts: $25,000
Money for renovation: $20,000
Total = $420,000
The applicant could increase their Mortgage up to 80% of the appraised home value which is: $550,000 * 0.80 = $440,000 (max Mortgage—assuming qualifying is not an issue).
In this example, if the clients wanted an extra $20,000 they could access it. Let’s just use $420,000 as the requested new Mortgage amount for now.
The $420,000 of new Mortgage is used to pay back the current lenders’ Mortgage (plus a penalty) and the personal debts. The $20,000 of additional money is paid to the clients as cash for the renovation.
In this example, the refinance was completed to provide capital up front for the renovation. Another path is to complete the renovations up front, then refinance after completion at a higher home value. This refinance can payout debts or replenish cash used to pay for the renovations up front.
How Is A Calgary Home Refinance Completed?
To accomplish a refinance, I think it’s good to be aware of the loan-to-value and qualifying—right out of the gate. Remember, Mortgage balance divided by estimated home value is less than 0.80.
If there is not enough home equity, OR there has been a drastic change to Mortgage qualifying since the applicants purchased their home, starting there is best.
Here’s what else is important to understand right away—the Mortgage payout penalty. If the current Mortgage is being paid back mid-term (not on the renewal date) there will be a payout penalty. I’ve experienced that not all lenders payout penalty formulas are the same. Understanding the payout penalty is important because that alone may make accessing home equity uneconomical.
Here are the steps of how to refinance:
- Ensure loan-to-value is workable. The one variable is the estimated home value. Calgary’s market is constantly changing. For estimation purposes, try to estimate your home value close to several similar and recently sold homes.
- Ensure qualifying is plausible. If you purchased a home, you’re a prime borrower. However, refinance Mortgages typically increase the Mortgage balance. Chat with me about qualifying.
- Mortgage penalty is not offensively high—and not a surprise later in this process. A refinance means taking a new Mortgage and paying back the current Mortgage. The incumbent lender charges a penalty for this, unless the refinance is completed on the Mortgage renewal date.
- Update your Mortgage application—we submit your Mortgage application and verify all moving parts with documentation (income, credit, current Mortgage and home value).
- Complete the new financing. Once everything is finalized, a new Mortgage will be registered on title of your home. At this stage, the new payment details are in existence and you should have all the benefits of your refinance now.
Here are some simple refinance cost categories to be aware of:
- Mortgage payout penalty. At a minimum, plan for a 3-month interest charge. To quickly calculate a 3-month interest penalty: (Mortgage amount * Mortgage interest rate (as a decimal)) * 0.25.
- Home appraisal. Plan for this to be $350-$500 (depending on property location, type, size etc).
- Legal fees. A lawyer or notary is required to at least direct funds at the time of the new Mortgage funding. Plan for this to be about $600-$1,200.
Conclusion:
A lot of times, a refinance is a fresh start—a new beginning. The applicants are making a new plan and taking action. I know that feels great!
I hope the above email is a helpful reminder of what a refinance is, how to execute this, and what basic initial steps to take.
If you have any questions about consolidating debts, home renovations, spousal buyouts, or accessing home equity for any reason—let me know!
Talk soon,
Chad Moore
P.S.
I got out to the Tsuut’ina Rodeo this past weekend. I saw traditional dress, dance, food and was front-and-centre for the calf roping event. I recommend this for exposure to local culture!
This weekend, another multi-night canoe trip! I’ll have rain gear and bug spray handy :-). Have a great weekend guys!
