If you’ve worked with a mortgage broker before, you may think that the only thing they can help you with is getting a mortgage. While this is somewhat true, a mortgage broker works with you to understand your entire financial position and works to make sure that you are building a secure financial future. For most consumers, a mortgage will be the largest purchase of their lives. Therefore, it plays an important role in your overall financial wellbeing.
Simply put, equity in your home is calculated by taking the current market value of your home and subtracting the principal balance owing on the property. Each mortgage payment you make, in part, reduces the amount you owe and increases your position in the property. Over time, through payments, appreciation of the local real estate market, and renovations, you can increase the amount of equity you have in your home.
For example, let’s say you put 20% down on your home two-years ago. You ended up finding a deal and bought your property for $250,000. At the time, you had $50,000 of equity (20%) in your property. You completed some self-funded renovations, and the market has fared quite well, and now your home is appraised at $300,000. In 2 years you will have paid down your principal balance by around $10,000, leaving roughly $190,000 on your mortgage. You now have $110,000 in equity in your property, which is around 37% based on the current market value.
Can I access the equity in my home?
You’re fairly excited to learn that your home is now worth quite a bit more than when you purchased it, and you’ve noticed that the mortgage rates are lower than when you bought your home. If you’re in a variable rate product, it might be a good time to think about a refinance. For borrowers in a Fixed-rate product, the benefits rarely outweigh the costs to break your term early. If you are in a variable rate product, the penalty for breaking your term early is capped at 3-months of interest. In the example above, this penalty would be around $1,700 if you were in a 5-year variable rate product at 3.5%.
You are able to refinance up to 80% of the current market value of your home. Using the example above, you could refinance up to $240,000 on your property. This would allow you to repay the $190,000 balance owing on your existing mortgage and give you access to up to $48,000 in low-interest funds after paying the penalty to break your term.
How can this help me?
Secured debt, like your mortgage, offers some of the lowest financing rates available. With rates as low as 2.2% at the time of writing, it offers an opportunity to capitalize on the equity you have built up your home for other needs. This can be used to pay down higher-interest unsecured debt like your credit card, or maybe you want to lock in a home equity line of credit (HELOC) to use in the future.
Alternatively, you might be worried that you could face a reduction in your income in the future due to the recent pandemic and want to make sure you have access to funds. If you are still employed and have not faced an interruption in your income and are in a variable-rate product with a rate higher than 3.00%, you should speak to a mortgage broker to discuss your options. Refinancing while rates are good can help you improve your financial position long-term and give you access to funds in the event you face financial difficulties in the future.
Whatever the reason, refinancing your home can help you reduce your stress and the amount of interest you will pay while you own your home. Things feel a bit unpredictable right now, and many people are facing unnecessary financial stress. Reach out to a mortgage broker and discuss the options available.
For additional information, contact Clinton Wilkins Mortgage Team or call 902-482-2770.