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  • Refinancing and Renovating

  • There are many reasons for refinancing a home; renovating is one of the best reasons! Refinancing means increasing the amount of the mortgage during the term (usually involving some penalty or blending of rates) or preferably when the term "matures". Refinancing essentially extracts additional money from the equity in the home (the difference between the value of the home and the current mortgage). Normally it is only possible to refinance up to 80% of the value of the home. So, for simplicity, if your home is worth $100K and your current mortgage is maturing with a balance of $50K and you have $30K of renovations that you would like to do, you would refinance your home from $50K to $80K (representing 80% of the value or loan-to-value LTV). If you have the income to afford it AND good credit, then the down payment comes from the equity in the home 20%. 

    The other most common reason for refinancing is to pay off debt like credit cards and unsecured lines of credit. Why would you want to get a bigger mortgage (which is a loan) to pay off another loan (credit card)? The main reason is the rate and the amortization. Imagine if somebody were carrying $30K in credit card debt at 15-20% versus if they increased their mortgage by $30K, used the money to pay those off and then enjoyed a rate that was 5x less. The catch is that the $30K is amortized over a relatively long period of time. So if you can pay off the credit cards in a shorter period, it is better NOT to add them to the mortgage. But if you are making the minimum payments indefinitely, then putting them on the mortgage is the way to go. 

    Needless to say, refinancing for the purposes of improving your home (renovating, buying a new furnace, air conditioner, new roof etc.) is an excellent investment because you are potentially increasing the value of your home = more equity!