Refinancing
In simple words, you break your existing mortgage contract with a financial institute, pay the outstanding balance in full by getting a new mortgage. The new refinanced mortgage amount could be higher with a new interest rate and terms & conditions. If your mortgage is closed and you break the mortgage before the expiry date of the existing term of your mortgage, then you must be aware that you will pay the penalty. If you refinance your mortgage at the end of the existing term, then there wouldn’t be any penalty.
Scenarios where refinancing can help you?
- To merge the high interest rate paying debts into the new mortgage
with much less interest rate. - Improve cash flow.
- To renovate the house to bring up property value.
- To help an adult child for his/her fees for higher education.
- To take the equity out from the existing mortgage to buy another
property and use the equity as down payment. - The new added amount in the mortgage by refinancing could be used to start new business.
Example
If the appraisal value of your home is $500,000, then you could refinance your mortgage for $400,000, the 80% of the appraisal value of your home. If the outstanding balance of your mortgage is $170,000, then you could borrow another $230,000.
Debt consolidation
In this example the existing mortgage amount is $170,000.
| Name of debt | Oustanding payment | Payment / month | New monthly payment |
| Mortgage Amount | $170,000.00 | $750.00 | |
| Store Master Card | $15,960.00 | $385.00 | |
| Bank Visa Card | $11,230.00 | $280.00 | |
| Unsecured Line of Credit | $38,750.00 | $540.00 | |
| Hardware Store Visa Card | $7565.00 | $245.00 | |
| Total | $243,505.00 | $2200.00 | |
| $1365.00 |
This new payment of $1365 would save $835.00 ($2200 – $1365.00) per month by merging all the debts into one new mortgage payment. In some cases, it is better to merge high interest rate debts such as credit cards and unsecured line of credits into the new refinanced amount of mortgage.