Posts

Utilizing the Equity in Your Home

Having been in your home for some time, steadily paying off you mortgage, you have subsequently been gaining equity. To access it, begins with refinancing. This is likely more accessible and at a lower cost than obtaining a loan not secured by your valuable asset – your home. For the most part, home equity loans and lines of credit hold lower interest rates and you can access up to 80% the appraised value of your home.

 

You can then utilize these funds to make investment with higher returns. You may plan to use the funds to make improvements on your home, increasing the resale price potential. Or you may plan to consolidate excising debt charging you a high interest rate, decreasing your debt load faster and increasing your monthly cash flow. Or you may want to pursue a business opportunity that will increase your future earning potential. The opportunities are plenty!

Insured, Insurable, Uninsurable?

Mortgage rate pricing is based much on insurance:

 

Insured mortgages are covered by mortgage default insurance through one of three insurers – CMHC, Genworth or Canada Guaranty. A premium is added to the mortgage amount. The amount is a percentage of the loan based on the loan to value ratio with a down payment of less than 20%. These mortgages are most favored by the banks and are reflected by the best rate offers.

 

Insurable mortgages do not necessarily require you to pay an insurance premium when you are providing a down payment larger than 20%. However, if the insurers rules allow, the lender has the option to obtain insurance them selves.

 

Uninsurable mortgages do not meet the insurers rules; such as refinances and mortgages with amortization longer than 25 years. So, no premium can be paid by either the borrower of the lender to obtain default insurance. The risk associated with these mortgages is passed onto the borrower via higher interest rates.

Mortgage Payment Frequency Options

There are many factors that may influence your choice of payment frequency, including your budget flexibility and when your pay cheques come in each. Moreover, your ability to take on slightly larger payments will enable you to minimize total interest paid and pay off your mortgage quicker.

Monthly

Your mortgage payment is withdrawn from your bank account on the same day each month; making 12 payments per year.

Bi-Weekly

Your monthly mortgage payment is multiplied by 12, then divided by pay period per year.

Accelerated Bi-Weekly

Your monthly mortgage payment is divided by 2; this amount is withdrawn every two weeks. Like Bi-Weekly, you are making a total of 26 payments per year, however, the payment amount is slightly more. So, you accelerate paying off your mortgage and will be paying less interest total.

Interest Rates: Fixed vs Variable

Fixed Interest Rates

Fixed rates are often viewed as the safest choice – no surprises. You can rest easy knowing exactly how much interest you are paying and that regardless of fluctuations in the prime rate (for better or worse), you interest will remain unchanged.

Fixed interest rate can be taken on 1, 2, 3, 5, 7 and even 10 year terms. Note the distinction between term and amortization; term is when your mortgage is up for renewal while amortization is the total time it will take to payoff your debt.

Now, say you committed to a 5 year term, but three years in you want to take advantage of a different lenders product. To do this, you will need to beak your mortgage. THERE WILL BE A PENALTY. The size of penalty varies depending on the lenders current rate, the rate you held, the length remaining on your term, and balance outstanding. Lenders charge a penalty using the greater of the Interest Rate Differential (IRD) or three months interest.

Variable Interest Rates

For those of us that are comfortable with a little uncertainty, Variable rates provide potential for interest saving and term flexibility.

Variable rates are based on a lenders prime rate; plus or minus a set premium of discount. These rates are mostly available on 5 year terms. However, unlike fixed interest rate, the penalty is calculated only using 3 months interest. So, breaking the mortgage will likely be significantly less costly.