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.?
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 cash out of your mortgage to use for other purposes. This process requires you to take out a larger mortgage than what you currently owe, so that you can receive the difference as a lump sum.
How Cash-Out Refinancing Works:
- If 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.
- 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.
Your new mortgage of $360,000 would come with a new amortization period — up to 30 years — and a new interest rate. Your regular mortgage payments would therefore reflect the new mortgage amount, interest rate and amortization.
Keep in mind, if you have extended your amortization or come in at a lower interest rate, your regular mortgage payments may be less than they were before the refinance, even with a higher mortgage balance.
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 your 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.
Why Refinance Your Mortgage?
- 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.
- Benefit from 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.
- Take advantage of the strong U.S. dollar: 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.
The Cost of Refinancing
Closing costs are part of the reality of financing a home. They’re 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.
RBC Bank is RBC Bank (Georgia), National Association (“RBC Bank”), a wholly owned U.S. banking subsidiary of Royal Bank of Canada, and is a member of the U.S. Federal Deposit Insurance Corporation (“FDIC”). U.S. deposit accounts are insured by the FDIC up to the maximum amount permissible by law. U.S. banking products and services are offered and provided by RBC Bank. Canadian banking products and services are offered and provided by Royal Bank of Canada. U.S. deposit accounts are not insured by the Canada Deposit Insurance Corporation (“CDIC”). RBC Bank, Equal Housing Lender.
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