There are several reasons you might choose to refinance your U.S. property — to reduce your mortgage payments, to take advantage of a lower interest rate, or to pull cash out of your home to fund a home renovation project or pay off other, higher-interest debt.
While rates are still relatively low in the U.S., now might be a great time to refinance your mortgage. By paying off your existing mortgage with a new loan, you could enjoy a lower interest rate and take advantage of the equity you’ve built up in your home. But how does it work in the U.S.?
Why refinance your mortgage?
First, here are three great reasons to refinance now:
- You’ll get a lump sum of cash.
With a cash-out refinance, you can pull money out of your home and get a lump sum to use however you wish. This is a great opportunity to take on home renovations, pay off debt in Canada, or cover U.S. expenses with a low-cost borrowing option.
- You benefit from the increased value. If you bought your home several years ago, it has likely gone up in value. Why wait to reap the benefits of this increase? By refinancing, you can take advantage of the rise in property value now.
- The U.S. dollar is currently strong. The U.S. dollar continues to hold strong against the loonie. That’s not always great news for Canadians, but if you bought your property when the U.S. and Canadian dollars were even, your home has likely grown in value simply as a result of the exchange rate. What’s more, since any money you pull out of your home is in U.S. dollars, you have the opportunity to bank a sum of U.S. cash, saving you the need to convert Canadian funds.
Two types of refinancing
Refinancing is simply the process of replacing an existing mortgage with a new one.
There are two main types of refinancing:
- The Rate and Term option is to lower your interest rate and/or change the terms of your existing mortgage.
- A Cash-Out Refinance, as the name suggests, allows you to pull money out of your mortgage. This process involves tapping into your equity and taking out a larger mortgage than what you currently owe. You receive the difference as a lump sum of cash that you can use for other purposes.
How cash-out refinancing works:
- Say your current mortgage amount is $300,000*
- And your current home value is $450,000.
Because you may be able to borrow as much as 80 per cent of your home’s value, given the figures above, you would be in a position to pull $60,000 out of your home by refinancing.
+ “I want to see how this is calculated.”
- 80 per cent of $450,000 is $360,000. The difference between what you can borrow ($360,000) and what you owe ($300,000) is $60,000.
- This cash-out amount would then be added to the current mortgage balance of $300,000, giving you a new total balance of $360,000 — and $60,000 in U.S. cash in hand.
Remember, your old mortgage will be replaced by a new one of $360,000, which would come with a new amortization period (up to 30 years) and a new interest rate. What could this mean for your mortgage payments? The scenario above may actually mean you can take $60,000 of cash out of your home without an increase in monthly payments, due to a fresh amortization period and potentially lower rates.
Since refinancing involves creating a brand-new mortgage, you will go through an approval process that may feel similar to when you secured your original mortgage. For this reason, you will need to provide some of the same paperwork to get approved — such as your proof of income, employment history, and account statements. And like with a new purchase, the home you are refinancing will be subject to an appraisal in order to confirm its current market value.
The cost of refinancing
Closing costs are part of the reality of financing a home. They are also a reality of refinancing and can range between 2 and 5 per cent of your mortgage amount.
If your home has gone up in value or you’re refinancing during a period of lower interest rates, the equity you are tapping into — and/or the money you’re saving on a lower interest rate — may more than offset these costs. The important thing is to understand what your closing costs will be, budget for them, and do the math to ensure refinancing is still a good financial move for you.
Home refinancing can be a great way to reduce your mortgage payments or leverage the value of your home to cover key expenses or pay off debt. Just be sure to consider the reasons, realities and costs of refinancing in advance.
*All figures in USD.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.