Home Equity & Renovation Mortgage
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Your first move must be to look into your mortgage options! You can acquire a much lower interest rate if you consider refinancing your mortgage. Keep in mind that it is also very risky, as it may incur a significant prepayment penalty, so make sure you do some research beforehand.
First, Get to Know Your Options.
One of the advantages of owning a house is the equity you build. You create equity as you pay your regular mortgage over time. Home equity is the difference between the worth of your home or its market value and the amount of your mortgage. Many homeowners can use this equity to acquire a lower-rate loan or credit line that can be used not only for renovations but also for their child's education, buying a new car, or acquiring a second home. The amount that you can borrow would depend on the accumulated equity you have. The more mortgages you pay, the more equity you gain for future use.
As stated above, you gain equity through paying your mortgage over time. If you decide to use this, you need to have your house appraised to determine its market value. Home equity is a type of loan where you use your house as collateral and get a specific loan amount based on its value. If you apply for an equity loan, you can borrow 80% of your property’s appraised value less the balance you still have on your mortgage. For instance:
Market value of your house = $400,000
80% of it ($400,000 x 0.8) = $320,000
Remaining balance on your mortgage = $200,000
80% value of your house ($320,000) – Remaining balance on mortgage ($200,000) = $120,000
Home Equity Line of Credit.
One of the most popular types of equity is HELOC, or Home Equity Line of Credit. HELOC is a secured type of loan in which the lender uses your house to guarantee that you will pay back what you have borrowed. It is a revolving credit where the lender or the financial institution does not release the funds in a lump sum. Basically, you will borrow a certain amount, pay it back, then borrow again, and it is only up to a certain limit. However, note that HELOC has the strictest requirements as you need to have good credit and an approvable income.
Today’s current interest rates are still at their lowest, one of the lowest in history due to the pandemic. This is a good time to consider breaking your existing mortgage and getting a new one to achieve the total amount you need. To break your current mortgage, your lender has the power, as it is one of their rights, to charge a penalty based on the larger of three months’ interest or the interest rate differential (IRD). This IRD is basically the difference between your former rate and the current rates for your current term.
Different lenders calculate IRD differently, based on their terms and conditions. You have to understand and read the terms and conditions of your bank to understand how to calculate your IRD. To get the actual penalty from your lender, you must request it. Typically, the three-month penalty applies if you are in a term longer than five years and you are past the fifth year. This applies to you and not the IRD, which will make breaking your mortgage more appealing.
Another option is to compare your new rate (either blended or extended) with the rate you plan to get with the new mortgage. The exact terms and conditions of your existing mortgage plan need to be reviewed by the lenders to determine if other factors need to be considered.
We are up-to-date on the current and latest trends, rates, and all-new available opportunities for you. We guarantee and assure you that it is worth your time and effort to ask a professional mortgage expert like us. Let us analyze and determine the options available for you and choose which is most beneficial for you and your situation. You can choose from a broad range of lenders in our portfolio. We can definitely help you with all of your mortgage details for your next home and other properties.
