How Refinancing Saves Money and Shields You From a Crisis

Refinances let you tap into your home's growing equity and save money which can be a lifesaver, especially in hard times. In this post, we talk about how it all works alongside what it looks like in action with some case studies about how clients on our team used the power of refinancing to save money and pay off expensive debt.

Refinances are really great ways to reduce your debt whether it be to cut your current mortgage because rates are much better than before, or to pay off other debt that charges much higher interest than your new structured mortgage.

Refinances work by replacing your current loan with a new one and this can be done with the current lender you have or a new one. This process is usually to get a lower rate than more than covers the time and administrative costs to make this switch. Many people get creative by pulling equity out of their home to pay off debts or start to smartly invest in their next investment property.

If you are a current homeowner and you want to access home equity for an investment property or to cover urgent debt or upcoming expense, you'll want to know this works

Refinances can be used as a mortgage transfer or renewal except you aren't just getting a lower rate, you are changing the terms of the mortgage. 

Here is an example:

Lots of people with growing families want to upsize from a condo to a new home but don't want to sell their current one. Here is what I strategize with growing families almost regularly who can't really afford the downpayment on the potential bigger home without selling the current one.

Their current condo is worth $500,000 and the new place they want to upsize to is worth $1,000,000. What I advise that they do is move their mortgage from one lender to another, assuming that interest rates in the market are lower today than when they renewed their mortgage five years ago. The family has built a fair amount of equity by now (50% typically) so the new lender recognizes that they own $250,000 and can pull out 30% more equity given that the limit you can pull out is 80% - they have $150,000 at their disposal. 

If for their $1,000,000 home they are putting 20% down to save paying for mortgage default insurance but only have $100,000 to access from savings, they would have been $100,000 short of the $200,000 needed. Of course, with the $150,000 refinanced on their original place, they can combine $100,000 of this with their savings and use this for their 20% down payment. They then put the remaining $50,000 in their otherwise depleted Savings account.

The result is that they now own 20% down on their new $1,000,000 home and are paying far less mortgage rate than the mortgage they got on the condo when rates were much higher. The old condo now has a tenant helping pay off the monthly mortgage and they can manage the mortgages of both homes under the same new lender.

Another common use for refinancing is to leverage it for upcoming home renovations. If you have had your home for a while and are eager to either repair something that is broken or implements a major kitchen remodel, you need liquid cash. As with the previous example, you can borrow up to 80% of your home's value and simply use it for the renovation costs.

If you're a First-time Homebuyer, look into the Purchase Plus Improvements Program where you can borrow additional money to cover some or all of your renovation costs just as you take possession of the new home. 

Consolidating debt, that is, paying off more expensive debt with cheaper debt, is a common and highly effective way to save money overnight with refinancing. See our alternative lenders video for an example of how a young couple paid off $80,000 in debt and saved a ton on interest charges.

One last consideration to refinance is to free up monthly cash flow by paying less per month on your mortgage. You can do this by stretching out the total principal mortgage amount that you owe by extending the amortization period from 25 to 30 years. Many people pay about $200 less a month on a typical $300,000 mortgage but, keep in mind, that you will pay more on long term interest charges. 

Refinancing, especially when rates are low, is the best personal finance move out there. It’s worth considering whether you want to start thinking of your next investment property, renovating your home, or mitigate the damage of debt.