People understand what refinancing a home is but they have trouble explaining how it works. Refinancing your home, to put it simply, allows you to access the equity you have built up by changing the mortgage amount.
For example, you bought a $300,000 condo and you paid 20%, which is $60,000, for your down payment and had a mortgage of $240,000. You continue making payments over the next 4 years and pay down the $240,000 you owed and now that amount is only $230,000. This is where a refinance could come into play – your mortgage is up for renewal in a year, but you want to do some renovations and you need to access the equity in your home.
This means that you will get an appraisal of your current home and submit that to a lender. Let’s say your $300,000 condo is now worth $350,000 and you owe $230,000. You have built up an additional $60,000 in equity: $350,000 less $230,000 less $60,000 which is your initial down payment. Your equity in the home is $120,000 because you have a mortgage of $230,000 on a home worth $350,000.
You can refinance your mortgage to access that $120,000. If you want to go back and take $50,000 from the $120,000 you have built up, your new mortgage would go from $230,000 to $280,000. You will be getting that $50,000 from the lender but that money will be added back on top of your mortgage.
Why Should You Refinance?
This is why people will refinance their homes to make higher purchases. The bank will let you borrow the money now and get it back in the future, plus interest because it is being added to the mortgage.
This is just one way on how people are able to use their home to access cash. There are other ways to do this, especially if you are looking to complete renovations. You can consider home equity lines of credit, collateral charges, and purchase plus mortgages. It can be extremely beneficial to know this before you buy. Working with a qualified Dominion Lending Centres broker for your home refinanceing in Toronto will surely give you an advantage.