Cash-Out Mortgage Refinancing?

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Most people experience a point in their lives when they need access to a large amount of cash, whether it be for a major purchase, home renovation, investment or an emergency. When you don’t have the funds on hand, you can always access the equity in your home through a cash-out mortgage refinance. As the value of your home increases, so too does your available home equity. Let’s say you bought your home in 2010 for $500,000 with a $400,000 mortgage, you’d own 20% of it. Let’s say you’ve since paid off $100,000 of your mortgage. If your home was still worth $500,000, you would now own 40% of it.

So why should you consider a cash-out mortgage refinance?

You may want to renovate your home or go back to school. You could be looking to put a down payment on an investment property, assist a family member with their down payment, or pay off an existing debt.

With alot of cash in hand, you could do that. Before you go running off to the bank, however, there are some important things to consider.

1. The terms of your mortgage will change

A cash-out mortgage refinancing will increase the amount you owe. If your mortgage is $300,000 now and you want to pull $100,000 out of your equity, your mortgage will jump to $400,000, as will the interest you owe.

To overcome this problem, one of two things will happen: you’ll either have to increase your monthly payment or extend the amortization (or a combination of the two).

You will have to audit your finances and decide which makes most sense for you. Most experts will tell you that the faster you can pay off your mortgage, the better. Others will tell you to use that money for more important things, especially since you’re presumably going to be paying your mortgage off over decades, and at historically low mortgage rates.

2. You’ll have to re-apply to a mortgage

Refinancing your mortgage results in a new mortgage, so you have to start the documentation process all over again, with your bank or mortgage broker requiring to approve you. This will include a check of your credit score, income statements and other personal financial records and your company’s financials as well (if you own a business).

The less cash you plan to take out, the easier it will be. You will still have to show that you’re able to manage the new debt you’re taking on.

This brings us to the most important consideration:

3. Don’t bother with this process if you plan to accumulate more debt!

A minority of homeowners may be tempted to use their new-found funds as a way to indulge in some long sought-after purchases or a dream vacation. It is recommended that you use the new funds for things to add value to yourself or home. How?

As mentioned earlier, a renovation that will increase the value of your home
Continuing education that can increase your future salary
An investment property that will grow your monthly income
High-interest debt repayment that will lower your monthly expenses.

Above are all good reasons to consider cash-out mortgage refinancing, but it’s also a risk taken.

Please remember that recent government mortgage changes (stress test) mean you need at least 20% equity in your home before you can even consider refinancing.

Have any questions? You’re welcome to get in touch!