With the hope that mortgage interest rates will gradually starting to decrease, many borrowers in Canada are looking to refinance their loans and take advantage of the rate reduction. When your credit is less than ideal, though, refinancing can be more difficult. Also, not all refinance decisions are based on taking advantage of better rates. Some borrowers want to use the refinance option to take out some of the equity they’ve built up in their home to pay for other expenses or to consolidate other debts that currently run at a higher interest rate, such as credit card balances and personal loans. This article has information that will help you determine the best path forward if you are considering a refinance on your mortgage.
Adding a HELOC
If all you’re looking to do is access home equity through the refinancing process, a home equity line of credit (HELOC) might be a superior option. Unless you’re dealing with the type of bad credit loans Alberta and other provinces have available, a HELOC can end up saving you money over time. In many cases, you can access as much as 65% of the current value of your home.
Here’s an example. Let’s say that you took out a $400,000 mortgage on a home currently worth $600,000. You still owe $100,000 on the house, so you have $500,000 in equity. You can tap as much as 65% of the home’s value, which would be $390,000. Because you still have $100,000 outstanding on the balance, you could access an additional $290,000 to reach $390,000 financed. While a HELOC will come with higher interest rates than the mortgage rates Alberta and other provinces currently have available, the good news is that while you might get approval to tap up to $290,000, you don’t have to take it all at once. In fact, you don’t have to take any of it if you decide not to. If you only take out $50,000, you would only owe that principal and interest back.
Blending and Extending
If the term “blend-and-extend mortgage is new to you,” the process works just like it sounds. You take your existing mortgage interest rate and combine it with a new one. Your current mortgage technically remains in effect, but the term extends and the interest rate moves to a level between what you have been paying on your existing mortgage and the current rates. You are not breaking your existing mortgage, so no prepayment fee would apply in the case of closed loans. Some administrative fees are likely to apply, but since the interest rate would likely be lower, you’re still ahead in terms of the overall borrowing cost. Blended mortgages also let you gain access to the equity you have built up in your home before the end of your existing mortgage.
Whether you are working with RMG Mortgages or another provider, you’ll find that most lending institutions have blended mortgages as an option, but they don’t market them. There are two main types of blended mortgages that may work for you.
The first type is the blend-and extend mortgage. This is the most common option, where the rate you’re paying on your current mortgage and the rate that is available for new mortgages today serve as guideposts for the blending. For example, if you have a fixed-rate mortgage at 9.5% with two years remaining on a five-year note, and the current fixed-rate mortgages are available at 6%, you would likely end up with a new fixed rate of about 7.75%, and the term would extend back to five years.
The other type is a blend-to-term mortgage. The only difference with a blend-to-term mortgage is that, while the rate still drops to a new number between your existing interest rate and the rates currently available in the market, the term would remain unchanged. So, in the prior example, your rate would still drop to 7.75% or so, but you would only have two years remaining on the loan. For people looking for stability, the blend-and-extend model makes more sense. If you believe that interest rates will continue to fall in the shorter term, going with blend-to-term gives you a discount today on your interest rate and also allows you to take advantage of another cut in payments once your existing mortgage term comes to an end.
Whether you go with blend-and-extend or blend-to-term (and whether you use RMG Mortgages or another provider), this type of loan has benefits and disadvantages. Some of the pros include:
- Gaining access to equity. You can use this kind of note to take out some of the equity you’ve built up in your home and then use that cash for other expenses.
- Seeing your interest rates drop. No matter which type of blended mortgage you choose, you are still going to have a lower rate than your current overall interest expense.
- Avoiding penalties. If you have a closed mortgage and pay it off early, you can end up paying a hefty pre-payment penalty. Either blended mortgage option keeps your current contract in place, so you will not have to pay any pre-payment costs.
Some of the disadvantages associated with blend-and-extend or blend-to-term mortgages include:
- Losing flexibility. If you decide to move after signing the paperwork on a blended mortgage, you cannot transfer the note to a new property.
- Remaining hostage to changing interest rates. Remember that interest rates can go up (or down) at any time. For this reason, especially given the volatility of today’s lending environment, it’s almost impossible to say which of the two options will save you money.
- Experiencing higher costs. You’ll definitely want to read the fine print on your blended mortgage paperwork. Depending on the terms of your existing contract and the fees that a lender may charge for the blended deal, it might just cost less to eat the pre-payment penalty and start over with a new mortgage.
Types of Mortgage Refinance
There are other types of mortgage refinance available, and you’ll want to make the decision based on your own financial situation and the comparative cost of mortgage rates Alberta lenders are offering (or elsewhere, depending on your province).
A cash-out refinance involves a new home loan for more money than what you currently owe. You’ll get the difference between the two loan amounts in a check. You’ll still have one mortgage payment, but because you have a new principal, term and interest rate, your payment amount will change.
A reverse mortgage is a special type of refinance, generally available only to people over the age of 55 in Canada who have a minimum amount of equity built up in their home. A reverse mortgage allows them to access their home equity, a month at a time, until they either pass away or move out of the home secured by the mortgage. When either of those events happens, the balance comes due, and the sale of the home will cover the proceeds of the loan, leaving the estate without any debt.
If your credit score or other elements of your borrowing application do not match the standards of traditional lenders, don’t hurry to sign the paperwork on any of the bad credit loans Alberta lenders may try to sell you. Instead, consider the possibility of taking out a short-term private mortgage – a loan to get you on your way while you repair your credit.
If you find yourself wondering, “Are private mortgages legal?” the answer is “Yes.” There are many individuals and business entities that invest in the mortgage market, extending funding to borrowers. The rates that they extend are generally higher than what borrowers can access through traditional lenders (banks and credit unions), because they are lending to borrowers that represent a higher risk on the basis of their lower credit score and/or other factors that keep them from being able to access traditional financing.
Private lenders generally offer loans that have a maximum term of one year, but on exception may allow for 2-3 years depending on the loan particulars. This gives borrowers time to get their credit profiles where they need to be for traditional lenders to work with them while also getting a jump on their home purchase dreams. In many cases, private lenders offer access to interest-only loans. Borrowers only pay the interest on the principal; at the end of the term, the borrower needs to have funding lined up to pay off the balance and transfer the loan to a new lender. If the process has worked as designed, the borrower has a loan approved through a bank or credit union at the end of the term, making transfer easy.
Obtaining a HELOC with a major bank is the most cost effective provided you are comfortable with your loan likely being a demand (or collateral loan). Blending and Extending is also very effective but should be looked at very closely with your Mortgage Refinance Options. Amansad Financial Services provides options when a HELOC, Blend & Extend or Refinance is not available. Our Brokerage will look to provide short term options to allow you to restructure your finances so that a better cost-effective option can be utilized within 12 – 24 months. In addition, Amansad Financial has relationships with private lending loan providers that will provide reverse-mortgage type loans in select provinces with no age restrictions. For a better understanding or some questions about the private mortgages or reverse-type (appreciation mortgage loans) we are able to provide, please contact us.