As the value of your property’s increase you are going to want to take advantage of this appreciation in different ways. It’s great to have equity in properties but it certainly does not allow you to feed your family. I often say you can’t eat equity.
In order to take advantage of the increased value whether it comes from a renovation or buying the property at a discount or through appreciation, refinancing can be a great option. The process is quite simple but the products that are available are quite different.
Let’s look at an example. We have a property worth $200,000 and a mortgage on the property of $100,000. In most cases we are able to access the equity up to 80% of the value of the property. This means that you could potentially have access to $60,000, which is $160,000 or 80% of the value of the property.
While $60,000 might not seem like a lot, spread over a number of properties this can quickly add up and allow you to purchase properties using your refinance properties or through secured lines of credit or loans. If you had four properties with $60,000 all of a sudden you have $240,000 to purchase properties with. That is the power of using refinances and secured lines of credit in order to provide the initial financing of your purchases.
Full Refinance
A full refinance usually means that you are going to get a new mortgage based on the refinanced value. This might happen at the end of a term for your mortgage on its renewal you are in a closed mortgage. If you are in an open mortgage you are able to do a full refund and with very minimal penalty if any. If you are in a variable mortgage you may still want to do full refinance and pay the three months interest penalty that usually comes with breaking a variable rate mortgage.
Whatever you choose to do, it’s important to understand the terms and penalties that are associated with you doing a full refinance on your mortgage. These can vary wildly depending on the lender and type of mortgage product that you are currently in.
Do you currently have the opportunity to do a full refinance on an existing property? How much equity could you release by doing the refinance? If you have a few properties calculate the total amount of equity you could release from your portfolio.
Blend and Extend
This is a process where the value of your property has increased but you are in the middle of a closed mortgage. You normally have to wait until the end of the term or pay penalties in order to break your mortgage. For example, if you were four years into a five year closed mortgage. you would normally have to pay the interest for that last year or other similar penalty.
With the blend and extend product you would get a new five-year mortgage based on the recent appraised value. the lender uses your old interest rate and the new terms interest rate to come up with the final interest rate for the new term. There may be pre-payment charges that all old occur because of this or administration fees so make sure to discuss this with your lender.
Do you currently have the opportunity to do a blend and extend or mortgage top up on an existing property? How much equity could you release by doing the refinance? If you have a few properties calculate the total amount of equity you could release from your portfolio.
Equity Take Out/Blanket Mortgages
This could be done as a blanket mortgage across a number of different properties. Let’s say you had equity in 10 properties each property had $25,000 in equity that could be utilized and bring the loan to value of each property up to 80%. It could be possible to access those funds by using a blanket mortgage or equity takeout and have access to hundred and $50,000. You will need to find a very understanding mortgage broker or agent that can help you to do this.
Do you currently have the opportunity to do a equity take-out or blanket on an existing property or across a portfolio? How much equity could you release by doing the refinance? If you have a few properties calculate the total amount of equity you could release from your portfolio.
HELOC
A home equity line of credit (HELOC) works much like a regular line of credit. You can borrow money whenever you want, up to the credit limit. You can pay it back and borrow again. You have to apply for a home equity line of credit to find out whether you qualify. guidelines to access these types of lines of credit have changed over the last few years. You used to be able to take 80% of your homes appraised value which was made up of your first mortgage your home equity line of credit. Now this has been limited to 65% of your homes appraised value. Lenders get around this by adding a fixed portion mortgage which is 15% of the line of credit enabling you to borrow 80%. I know it sounds a little confusing but talk to your lender in order to get the details.
Do you currently have the opportunity to add a HELOC on an existing property? How much equity could you release by doing the refinance? If you have a few properties calculate the total amount of equity you could release from your portfolio.
Re-Advancable Mortgages
each bank has a different name for this product. If it is an option I would suggest you take it at the institution that you are working with. What happens with the rehab danceable mortgage is that any principle pay down that you make on the mortgage becomes accessible on a secured line of credit that’s attached the property. So each mortgage is made up of two parts of the mortgage and secured line of credit. Let’s say you have a mortgage payment of $1000 – $600 goes to interest and $400 rose to principal payments. Once you make the mortgage payment the $400 becomes available on the line of credit.
Some banks allow you restart your financing as if it were the first day you got your mortgage if you are in a readvanceable mortgage. One example is The bank of Scotiabank which allows you take out any mortgage pay down that you did over the term of the mortgage. If you have access to their STEP mortgage then you can take advantage of this. The STEP mortgage is a re-advancable mortgage product but any principal pay down that you make over the term of the mortgage can be taken out at the end of the term and the mortgage amortization reset.
Let’s say your mortgage started off as $200,000 with 30 year amortization but over the course of five years you were able to bring the mortgage down to $185,000. Scotiabank would enable you take out the $15,000 of mortgage pay down and start the amortization again to 30 years.
there are many things that you need to consider if you’re going to use a strategy where you continue to leverage the property rather than let the mortgage to pay down by principal payments. What are you trying to accomplish by doing this and what type of penalties or fees will be associated with it.
Using each of the above action items for this section, what is the total amount of equity that you could release from your exiting properties? Remember, this could also be for your principal residence.