Refinancing Your Mortgage – The Importance of Equity
How Much Equity Do You Need to Refinance?
Lenders will only refinance up to 80% of a home’s value so you need to have 20% equity left after funding.
Refinancing a mortgage can be a wise financial move for many homeowners. It can help you secure a lower interest rate, reduce your monthly payments, and even access the equity in your home for other purposes. However, before you can refinance, you need to meet certain requirements, including having enough equity in your home. In this article, we will explore how much equity you need to refinance your mortgage in Canada.
What is Equity?
Equity is the difference between the current market value of your home and the outstanding balance on your mortgage. For example, if your home is currently worth $500,000, and you have a mortgage balance of $300,000, your equity is $200,000.
Equity is an important factor when it comes to refinancing because it determines how much you can borrow and what kind of interest rate you can get. Lenders use your equity as collateral for the loan, and the more equity you have, the less risk there is for the lender.
How Much Equity Do You Need to Refinance?
The amount of equity you need to refinance your mortgage in Canada varies depending on the lender and the type of mortgage you have. However, most lenders require you to have at least 20% equity in your home to qualify for a refinance.
This means that if your home is worth $500,000, you need to have a minimum of $100,000 left in equity to refinance post-funding.
It’s important to note that some lenders may have stricter equity requirements, particularly if you are looking to refinance a second property or a rental property. In these cases, you may need to have even more equity to qualify for a refinance.
Why Does Equity Matter for Refinancing?
As we mentioned earlier, equity is important for refinancing because it provides security for the lender. When you refinance, you are essentially taking out a new mortgage to pay off your existing one. If you default on the loan, the lender can sell your home to recover their money. Having equity in your home reduces the risk for the lender and makes them more likely to approve your refinance application.
In addition, having more equity can also help you secure a better interest rate and more favourable loan terms. If you have a high level of equity in your home, you may be able to negotiate a lower interest rate or a longer repayment term, which can make your monthly payments more manageable.
How to Build Equity in Your Home
If you are considering refinancing your mortgage but don’t have enough equity, there are a few things you can do to build equity in your home:
- Make extra payments: Making extra payments towards your mortgage can help you pay off your loan faster and increase your equity.
- Renovate your home: Renovations that increase the value of your home, such as adding a new bathroom or updating your kitchen, can also increase your equity.
- Wait: If you can’t afford to make extra payments or undertake renovations, you can simply wait for your home’s value to increase. In a strong housing market, your home may appreciate in value over time, which can increase your equity.
Mortgage refinancing can be a great way to lower your monthly payments, secure a better interest rate, and access the equity in your home. However, before you can refinance, you need to have enough equity in your home to meet the lender’s requirements. When it comes to refinancing, a mortgage broker can help you navigate the process and find the best refinance options for your needs. They can assess your financial situation, help you understand your equity requirements, and guide you through the application process. They can also help you understand the costs associated with refinancing, such as appraisal fees, legal fees, and prepayment penalties.
For more information on Mortgage Refinancing call 416-912-6200