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• May 24, 2022

Mortgage Refinancing for Debt Consolidation, Equity Take Out & More

Mortgage Refinance for debt consolidation

There are a few reasons you might consider refinancing a mortgage, but where do you start, and how do you know you’re making the right decisions? It can be a confusing and technical landscape to navigate alone, so it helps to have an expert guide you through the process. 

In this post, we cover everything you need to know about mortgage refinancing, including:

  • What it means to refinance a mortgage
  • The two main reasons why you should consider refinancing
  • How a mortgage refinance differs from a renewal
  • The four main benefits of refinancing
  • And how equity-take-out works

What is refinancing a mortgage?

When you refinance your mortgage, you’re simply breaking your current mortgage loan agreement and replacing it with a new one. Your new loan will, of course, be used to pay off the balance left on the original mortgage that you are refinancing.

You can refinance your mortgage at any time; it doesn’t just have to be at your renewal. However, it’s essential to note that you could be subject to a hefty prepayment penalty if you decide to refinance your mortgage before the renewal date. If you’re looking to minimize or avoid this penalty altogether, your best bet is to get the advice of a mortgage broker. They can guide you through the process and advise the best course of action.

So why might you look to refinance your mortgage? Well, life is unpredictable ––an external factor can cause a change to your life (good or bad), a new opportunity could arise, or you might experience a shift in lifestyle.  When these changes come in the middle of your mortgage term, refinancing may be a good option.

Let’s look at some scenarios that may prompt you to consider refinancing your mortgage:

  • The opportunity arises to decrease your mortgage costs by lowering interest rates
  • You’d like to access your home’s equity in order to:
    • Make a big ticket purchase like a car, boat, or vacation property
    • Purchase a rental property
    • Start a business
    • Take part in an investment opportunity
  • A spousal buyout in the event of a divorce
  • Changing from a fixed to a variable rate mortgage
  • To pay off your mortgage faster
  • To pay off high interest loans

How does a mortgage refinance differ from a renewal?

The difference is pretty simple. When you choose to renew your mortgage, you are, for the most part, agreeing to keep things the way they have been. The terms and mortgage length will remain the same, and you will be receiving the interest rates offered by your current lender.

If you decide to refinance, you’ll be doing the opposite. You are breaking your current mortgage agreement to create a new one that better fits your needs. Refinancing your mortgage means: 

  • You can get a new rate and better terms to help lower your monthly mortgage costs or help you to pay down the mortgage faster.
  • You get access to additional funds via an equity-take-out 

The Benefits

Mortgage refinancing can offer a wide range of benefits for homeowners. 

Change The Interest Rate And Term 

Who wouldn’t want to lower their monthly mortgage costs? Refinancing your mortgage to get a lower interest rate will do just that. 

You also may have the opportunity to lower both the interest rate and amortization, which allows you to pay off your mortgage faster while keeping your monthly payments relatively similar.

Refinancing also allows you to switch from a fixed rate to a variable rate mortgage. 

Consolidate Debt

You can also tap into the equity you have in your home to increase your mortgage amount––this then allows you to roll some of your high-interest loans, such as credit card debt or car loans, into one simple low mortgage payment.

Since mortgages carry lower interest rates compared to most forms of debt, you have the potential to save hundreds of dollars in interest every month by wrapping your high-interest debt into your mortgage.

Reset The Repayment Schedule

You can also lower your monthly mortgage payments by extending the amortization period when you refinance. This will free up cash flow for you, but it will also increase the time it takes to pay off your mortgage.However, once you can afford higher payments, you can utilize prepayment privileges to pay down your mortgage faster. 

Equity Take Out

An equity take out gives you the ability to pull out money by tapping into the equity that you have in your home. These funds can be used for purchases such as:

  • Renovation costs
  • Investments
  • A new car
  • Whatever else you need it for!

Depending on how much equity you have in your home, you may have access to quite a large amount of funds. This gives you the ability to use them for larger purchases, such as the down payment on a home for a loved one or a rental property. In the next section we will provide an example of how an equity-take-out works.

How does an equity-take-out work?

There is a limit to the amount of money you will be able to access when refinancing your mortgage. That limit is 80% of the equity that you have in your home.

Let’s look at an example to show how equity-take-out works.

If you have a $300,000 mortgage on a property with a value of $1,000,000, your equity in the home would be $700,000 ($1,000,000 – $300,000). As mentioned above, when you refinance your home, you can access 80% of the equity that you have in your home. Therefore, you would have the potential to increase your mortgage to $560,000 (700,000 * 80%) if you can qualify for this amount. . This would give you access to an additional $260,000. 

Want to Learn More? Talk to a Pineapple Mortgage Expert

Refinancing your mortgage can be a valuable tool to help you save money and provide you with funds that you would otherwise not have access to. The expert brokers at Pineapple will not only identify if refinancing your mortgage is the right move to make, but they also have access to Canada’s leading lenders and will leverage their relationships with them to find the best option for you when refinancing. Get in touch today!

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