Equity Take Out Refinance: What You Need to Know

What Is An Equity Take Out Refinance?

An equity take out refinance allows you to replace your existing mortgage with a new mortgage for a higher amount and pocket the difference in cash. Your new maximum mortgage amount can be as high as 80% of the value of your home.

How Does An Equity Take Out Refinance Work?

A refinance works by replacing your current mortgage with a new one. If you have had your current mortgage for a while chances are you’ve built up some equity in your home assuming your home value has increased or stayed the same. As long as you keep 20% of the equity in your property, the rest could be taken out.

Equity Take Out Refinance Step-by-Step Process

You'll be happy to know that compared to the original mortgage process, the process of refinancing is much easier.

Step 1: Simply complete a mortgage application with us using our online application or over the phone. Once we have your information and goals we’ll let you know what your options are and how the new mortgage numbers could look for you.

Step 2: When you're ready, we'll submit the application to your chosen lender and order an appraisal if required. Your new mortgage could fund as soon as 3 weeks from the time we've collected all documents from you.

Step 3: On the closing day, your new lender will send the new mortgage funds to your lawyer or closing company, who will disburse the appropriate amount to your current mortgage lender to pay off your existing mortgage. The leftover cash will be deposited into your bank account.

Documents Required

The documents that will be required are:

- Proof of income
- Property Tax Statement
- Mortgage Statement(s)
- Debt payout statements (if applicable)
- Home Insurance Document

Closing Costs

The job we do as your mortgage broker is free. We get paid by the lender after your mortgage has closed.

Appraisal: An appraisal is required most of the time ($350-$550)

Legal Fees: If we use the closing company First Canadian Title to close your mortgage the legal fees will be approximately $900. If you prefer to use your lawyer instead, they will likely charge you $1500-$1800.

Discharge Fee: Your lender will charge a discharge fee ($350-$500)

Penalty: If your current mortgage term isn’t up for renewal there will be a penalty to break it. This penalty could be as low as 3-months of interest.

Lender Promotions

There are sometimes “free refinance” promotions put on by lenders that uses First Canadian Title and covers the appraisal and discharge fee costs.

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Using Equity Take Out Refinancing for Home Improvements or Investing

Another potential benefit of equity take out refinancing is using the funds for home improvements or investing. By taking advantage of low mortgage interest rates, you may be able to borrow at a more favourable rate than using a credit card or line of credit. This can be especially beneficial if you plan to invest the funds at a higher rate than the mortgage interest rate. Enjoy an increased sense of satisfaction and accomplishment from improving your home or investing for your future.

Consolidating High-Interest Debt with Equity Take Out Refinancing

One potential benefit of equity take out refinancing is consolidating high-interest debt. By obtaining a new mortgage, you can pay off your existing mortgage and use the additional funds to pay off some or all of your high-interest debt. This can improve your monthly cash flow and allow you to pay off your mortgage faster or invest for the future. Enjoy peace of mind and a strengthened sense of financial stability.

Pros of an equity take out refinance:

• Can consolidate high-interest debt and improve monthly cash flow
• Can provide funds for home improvements or investing
• Can take advantage of low interest rates to borrow at a favourable rate
• Can extend the amortization period of your mortgage and lower regular payments
• Can lower overall cost of borrowing if current interest rates are lower than existing debt

Cons of an equity take out refinance:

• May require some upfront costs, such as legal fees and appraisal fees
• May require a satisfactory credit score and financial position to qualify for a new mortgage
• May require you to pay a costly penalty to break your existing mortgage

What's the difference between a home equity loan and an equity take out refinance?

A home equity loan and an equity take out refinance are similar in that they both allow homeowners to borrow against the equity in their homes. However, there are some key differences between the two options.

A home equity loan is a separate loan that is secured by the equity in your home. It typically has a fixed interest rate and a fixed repayment term. You receive the loan amount in a lump sum and then make regular payments to repay the loan.

An equity take out refinance, on the other hand, involves replacing your existing mortgage with a new mortgage that has a higher loan amount. The additional funds can be used for any purpose, such as consolidating high-interest debt or funding home improvements. The new mortgage will have its own terms, including a new interest rate and repayment schedule.

Equity Take Out Refinance Alternatives

Alternatives to refinancing your mortgage include taking out a home equity line of credit (HELOC), a second mortgage, or refinancing with a reverse mortgage. These options can provide access to your home equity, but they come with their own pros and cons.

Home Equity Line Of Credit:

A HELOC works like a personal line of credit, except it is secured against your property. This means it comes with lower interest rates than unsecured lines of credit. However, the interest rate on a HELOC is usually higher than the rate on a mortgage, and it is based on the prime rate, which can fluctuate. HELOCs only require interest-only payments each month.

Second Mortgage / Home Equity Loan:

A home equity loan is a type of loan that allows you to borrow money using your home's equity as collateral. It is sometimes referred to as a second mortgage because it is a loan that is taken out in addition to your existing mortgage. With a home equity loan, you can borrow money against the equity you have built up in your home without having to replace your current mortgage. This means your existing mortgage terms and interest rate will remain the same.

Reverse Mortgage

With a reverse mortgage, you do not have to make monthly payments like you do with a traditional mortgage. Instead, the loan is repaid when the borrower sells the property, moves out, or passes away.

Reverse mortgages are typically available to Canadians 55 and older, although some lenders will consider applicants of any age.

When Does An Equity Take Out Refinance Make Sense?

When considering refinancing your mortgage, it's important to weigh the potential savings against the costs of refinancing. If the savings you will enjoy outweigh the costs, refinancing may make sense. However, if the costs are too high, it may not be worth it.

One of the main disadvantages of refinancing is that it involves paying off your existing mortgage early, which may result in a penalty. In some cases, the penalty may be small compared to the savings you will receive, especially if you are paying off high-interest debt. However, in other cases, the penalty may be too high to make refinancing worthwhile.

If you're unsure whether refinancing is the right choice for you, speak with us and we can help you explore your options and determine the best course of action. In some cases, it may be more beneficial to wait until your mortgage renewal, when there is no penalty for paying off your existing mortgage early.

Should You Use a Mortgage Broker or the Bank?

Mortgage brokers offer several key benefits that can make the process of getting a mortgage easier and more affordable.

• Time and money savings: Working with a mortgage broker is free and easy, and can save you time and money. A broker will handle all the paperwork and negotiate with lenders on your behalf, so you don't have to.
• Best rates available: Because we are part of one of the largest mortgage brokerage companies, we have access to large volume discounts from lenders. This means we can offer our clients the best rates available.
• Unbiased advice: Unlike banks, which can only offer their own mortgage products, mortgage brokers can check with multiple lenders to find the best rate for your situation. This means you can be sure you are getting the best deal available.
• Personalized service: A mortgage broker is dedicated to you and focused on giving you an amazing experience. You will get expert, personalized advice based on your specific needs and goals.
• No changes to banking procedures: You don't have to open a new bank account or make any changes to your current banking procedures when working with a mortgage broker.
• Peace of mind: Knowing that you are getting expert, unbiased advice from an experienced professional can provide peace of mind and help you make the best financial decisions for your situation.

Ready to get started? Get your free consultation today!