Refinancing can be a good option for everyone looking to take advantage of lower mortgage interest rates or want to change the terms or type of your mortgage. It’s also often used to access the home equity you accumulated over the years or for debt consolidation.
If interest rates are 1-2% lower than when you signed up for your mortgage, refinancing with a lower interest rate will probably pay off for you. Refinancing is also typically the best option if you want to use your home equity to cover unexpected costs like medical expenses or finance bigger investments, such as home renovations or education.
You can also use mortgage refinancing for debt consolidation, depending on your outstanding debt and the amount of home equity accumulated over time. Usually, this is the most affordable option when you’ve accumulated a solid amount of equity.
To understand the math behind mortgage refinancing for accessing your equity, here’s a simple example:
Let’s assume six years ago, you’ve purchased a home for $100,000. To finance this purchase, you’ve taken out a mortgage of $80,000 with a 3.5% interest rate. Now, you’re looking to access your accumulated home equity through mortgage refinancing.
You need to consider two things: how much you have already paid off and how much your home is worth in current market conditions.
After six years of making regular mortgage payments, you've reduced your loan balance through principal payments and potentially gained equity due to any home value increase. Let’s say the remaining balance would be around $70,000.
Let's also assume your home has appreciated over these six years and is now worth $120,000. Most lenders allow you to borrow only up against a certain percentage of your home’s value, typically 80-85%.
Your current estimated equity equals your home’s current value ($120,000) minus the remaining loan balance ($70,000). So, in this case, it’s $50,000. The maximum loan amount you take out equals $120,000 * 80% ($96,000). The new mortgage will have a different interest rate and term than your original mortgage.
You get your maximum cash-out amount by subtracting your remaining loan balance ($70,000) from the maximum new loan amount ($96,000). In this case, it’s $26,000.
When refinancing, you must carefully consider the fees and penalties for breaking your current contract. You need to ensure that even after paying all these, plus the legal fees involved, you’ll still be better off than keeping your current mortgage contract.
If you choose to refinance, my team and I will ensure you thoroughly understand all the associated costs and choose the best option available, depending on your financial end goal. Our goal is not for you to refinance no matter what but to ensure this is really the best and most affordable strategy for you.
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