Should You Refinance to Release Some of the Built-up Equity In Your Home?

July 20, 2017

Should You Refinance to Release Some of the Built-up Equity In Your Home?

There are two main reasons why people refinance. One is to save money with a lower interest rate. The other reason is for the equity. When you pay down your mortgage for a couple years, you’ll own more of your property. This extra value, known as equity, can be used to meet other financial goals when you refinance.

How Much Equity Do I Have?

The amount of equity you have depends on two things:

  • How much you’ve paid down your loan
  • The value of your property, which changes over time

Equity is defined as the difference between what you owe and the amount your property could be sold for if you or your lender were to put it on the market today. The longer you make your monthly repayments, or even make early additional repayments, the greater your equity.

If your home is valued at a different amount, you may have more equity, even without having paid down more of your loan. With more equity, you’ll be able to take out more money when you refinance. Also, you may be able to avoid having to pay lender’s mortgage insurance a second time around, which can reduce the cost of refinancing by thousands of dollars.

When you refinance, your lender will do another valuation of your home – and you’ll pay valuation fees again. One thing to consider when going through the refinancing process is that lenders may value your property differently. This may change how much you are able to borrow.

What Can I Do with My Built-Up Equity?

There are a few reasons you may want to refinance to access your equity. You can use the money to finance a renovation project. Maybe you want to redo your kitchen, add more space to your current home, or renovate the entire property. Renovating is a popular option for homeowners who are thinking of selling in the future – a home renovation can greatly enhance the value of your home.

If you are thinking of buying a second property, you can refinance on your current one and use the money to make a purchase. This is a smart choice if you have paid off most of your home loan but have a high income and several years before retirement to invest in a second property. This investment could end up serving as an extra source of income when you retire. Before making such a huge investment, it’s always wise to consult with your financial advisor.

Another reason to refinance is to use the money for personal purposes. For example, if you’ve built up high-interest credit card debt, when you refinance you’ll be able to consolidate this debt with your lower mortgage rate. Depending on how much debt you have, you could save a lot of money in interest while also simplifying your finances. The money can also be used to make a big purchase such as a new car or to pay for a holiday. Instead of taking out an auto loan or other financing, your equity can be used to pay for your lifestyle needs.

One thing you should never do, however, is refinance just to access more cash. If you have trouble budgeting and keeping your spending under control, refinancing will only lead to more debt. Also, you’ll have to pay fees to switch to a new home loan. Make sure the benefits outweigh these costs before you jump into your equity.

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