But how do you know whether you have enough equity to consider refinancing? Just give me a call! The first question I'll ask is what you think your house is worth and what the assessed value is. From my experience of seeing appraisals on a daily basis and knowing local neighbourhoods, I'll have a pretty good grasp of what your home is worth. So to give you a rough idea of how much equity is available to you, I take your home's market value--say $200,000--and subtract your existing mortgage balance--say $100,000. So that means you have $100,000 of equity. Since you can only refinance up to 75% of the home value without incurring CMHC insurance fees, in this case, you'd have $50,000 available for debt consolidation.
In most cases, refinancing is fast and easy. If you're a wage earner, you need a recent pay stub, your most recent T4 and your latest mortgage statement. If you're self-employed, you need three years of income tax returns and your most recent mortgage statement. If an appraisal is required, it'll cost anywhere from $200 to $250, depending on your local market. Legal fees typically range from $400 to $800. Basically, from start to finish, refinancing can be complete in as little as five business days.
Of course, all these costs are usually more than covered by your interest savings. This can even be true of the penalty for breaking out of an existing mortgage. I'll do a cost benefit analysis. In 95% of cases, it's worth paying the penalty. If not, I'll advise you of the cost and suggest you consider waiting until your mortgage comes up for renewal.
I'll ascertain whether or not refinancing makes sense for you as part of an overall debt management strategy.
Please have a look at the example of refinancing for debt consolidation I've included below. If you're interested in exploring the possibilities in your situation, the first step is to call me. We'll talk about your needs and financial realities, then I'll ascertain whether or not refinancing makes sense for you as part of an overall debt management strategy.
Example of the potential benefits of refinancing for debt repayment.
Current market value of your home:
$200,000
Existing first mortgage at 5.50% (monthly payment $685):
$100,000
Available equity to refinance (can be increased, but CMHC fees will be incurred): $50,000
Car loan at 8% (monthly payment $425):
$15,000
Credit card balance at 18% (minimum monthly payment $240, almost all interest): $8,000
Home needs a new roof and furnace:
$10,000
Unused RRSP contribution room available (you earn $60,000/year and have 20 years until retirement):
$17,000
Total non-mortgage funds required:
$50,000
Current total monthly payments:
$1,350
You take out a new mortgage of $150,000 at a 5-year closed rate of 4.75%. Amortized over 20 years, the new monthly payment is $965 (as an option, change the payment to $483 bi-weekly and the amortization is lowered to 18 years). Total monthly payments have been reduced from $1350 to $965, a saving of $385 per month or $4,620 per year.
If the $17,000 lump sum and $4,620 per year were invested in an RRSP for 20 years, assuming an annual return of 8%, this would produce an RRSP value of $290,000 in 20 years. Assuming a marginal tax rate of 30%, in the first year you'd receive a tax refund of $5,100 from the $17,000 RRSP contribution. Each subsequent year, a $1,380 tax refund would be realized from the $4,620 RRSP contribution. These refunds could be re-invested in RRSPs, or they could be used to pay down the mortgage or fund a vacation.
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