Sometimes life throws a curveball your way and you wind up needing extra cash, fast. While most Canadians have a savings account, the amount of money you have squirrelled away in there may not be enough. For this reason, many people will choose to take out a loan. If you’re a homeowner, you have additional options available that may be better suited to your needs. Refinancing your home can get you access to money you can then use to pay bills, cover expenses etc.
Take some time to learn more about mortgage refinancing and more specifically, equity take out refinancing, to see if it may be a good fit for you:
What Is An Equity Take Out Refinance?
An equity take out refinance allows you to refinance your mortgage for more than what you still owe on it and walk away with the difference in cash. The key to qualifying for this option is having at least 20% equity in your home, which means you can’t owe more than 80% of the value of your home.
How Does An Equity Take Out Refinance Work?
An equity take out refinance is one of many ways to leverage the equity you’ve built in your own home to unlock extra money. If you’ve owned your home for a few years and you’ve been making regular mortgage payments, you should have a certain amount of equity built up. As long as that equity is 20% or more, you should qualify for an equity take out refinance if your credit and overall financial profiles are strong.
Pros Of Equity Take Out Refinance
If you’re considering refinancing, there are plenty of pros to help sweeten the deal. Since the home collateralizes the loan, you’ll typically get access to lower interest rates compared to credit cards or unsecured personal loans. Replacing your existing mortgage with a newer one at a 15- or 30-year amortization period will allow you more time to pay off your loan so you’re not struggling to make payments in a smaller period of time. Refinancing also gets you access to larger amounts of money compared to other types of loans, so if you’re in need of extra money for home improvements, to cover unexpected bills or just so you can take your dream vacation sooner, this is a great option.
Cons Of Equity Take Out Refinance
Before you run off to the bank to refinance, make sure you take into consideration what that means and how things will change as a result of this decision. Choosing to refinance your mortgage means your terms will change, the amount of money you owe will increase, and as a result, so will the interest over the life of the loan. You’ll also risk paying closing costs upfront, and those can be hefty. If you fail to allot for the higher mortgage payments and how the change of terms may affect your budget, you could even find yourself at risk of foreclosure, so make sure you’re prepared.
Difference Between Home Equity Loans And Equity Take Out Refinancing
An equity take out refinance is an alternative to home equity loans and lines of credit but there are definitely differences you’ll want to know about in advance. A home equity loan is a separate loan that you add on to your mortgage, whereas an equity take out refinance actually replaces your existing mortgage with a new one. An equity take out refinance will typically offer lower interest rates, but could be subject to prepayment fees you wouldn’t encounter with a home equity loan.
Equity Take Out Refinance Alternatives
Not sure an equity take out refinance is the right choice for you? Learn more about other options and how they compare before you make any decisions.
Home Equity Loan
A home equity loan, also referred to as a second mortgage, allows you to borrow money against your home’s equity without having to completely replace your existing mortgage. This means your mortgage will stay as it is, with the same terms and interest rate.
Home Equity Line Of Credit:
Known as HELOC for short, this option works more like a credit card, allowing you to borrow money against your home’s equity without replacing your original mortgage. The key here is that you’ll have a credit limit and you’ll only be charged interest on the money you withdraw. This means you can continue to borrow whenever you like and just pay it back as you go.
Reverse Mortgage
If you’re 55+ years of age, you may quality for a reverse mortgage, which is essentially a loan that allows you to access money through your home’s equity without the need to sell it.
When Does An Equity Take Out Refinance Make Sense?
If you’re looking to undertake a big home renovation project, want to go back to school, pay off your debt for good or maybe even put a down payment on an investment property, an influx of extra cash could make all of these goals possible. If you find yourself in need of extra money, it’s wise to consider an equity take out refinance amongst other options as it may be well suited to your current situation.
As always, before you make any big financial decisions, it’s important to understand all your options. If you have more questions about what an equity take out refinance is and how it can work in your favour, get in touch with our mortgage experts to learn more.