Mortgage vs. HELOC
Mortgage refinancing involves paying off an existing mortgage with a brand new one. It is normally done to take advantage of a lower interest rate, consolidate debt or access additional equity in your home. You can refinance as long as you don't exceed more than 80% of the equity in your home.
Imagine you're 3 years into your 5 year fixed term mortgage and interest rates have significantly decreased since you first got your mortgage loan. Everyone you know who's getting a mortgage now is getting a much lower rate on the same term as you. Should you honour your mortgage obligation and stick it out with the higher rate for another 2 years until it's time to renew or refinance now and take advantage for the lower mortgage rate? This question is tricky since refinancing your mortgage prior to maturity normally results in a penalty. The decision should be based on whether the savings from the lower rate for the remaining term of the mortgage outweighs the penalty you would incur. Penalties vary across institutions and also depend on the mortgage type (fixed vs. variable), term as well as your mortgage rate and current market rates.
Thinking of refinancing your mortgage to take advantage of a lower rate? Use the Rates.ca Mortgage Penalty Calculator to see if it's worthwhile.
If you're neck deep in high interest debt (i.e. credit cards, personal loans, etc.) and have equity in your home, refinancing your mortgage is a great solution to your debt problem. Refinancing with either a mortgage or a Home Equity Line of Credit (HELOC) can help you lower your monthly payments and pay off your debt quicker. It can also help you manage your expenses better in making one monthly payment as opposed to several payments a month to cover all your debt obligations. Through refinancing you'd be able to pay off your existing mortgage with a larger mortgage, with the difference between the two being used to consolidate your debts.
Thinking of refinancing your mortgage to consolidate your debts? Use the Rates.ca Debt Consolidation Calculator to compare the cost of refinancing (penalty) with the benefit of lower interest and payments due to consolidation.
If you would like to renovate your home, take care of unforeseen medical expenses, pay for post-secondary education, invest in a new business opportunity or just require immediate cash for any other reason, refinancing could be the solution you're looking for. You can access the equity in your home by refinancing through either a brand new mortgage or a HELOC. Of course, as with the other two scenarios above, refinancing prior to maturity would likely result in a pre-payment penalty.
Compare the mortgage penalty with the opportunity of having access to the equity in your home to help you make your decision.
If you are refinancing to consolidate your debt or trying to access equity in your home, you may be able to avoid the penalty associated with breaking your existing mortgage prior to maturity, if your lender offers a 'blend and extend' option. This means that any additional money that you would borrow would be added to your existing mortgage with the rate being a weighted average of the existing rate and the new rate on the borrowed funds.
Be careful when refinancing your mortgage if your home value has gone down since you first purchased your mortgage; the property may be re-appraised as part of the refinancing application. If that's the case it will result in the new mortgage being less than the original mortgage.