Have you ever heard about cash out refinance canada? We will tell you what it is and how it works really soon if not. Imagine that you have finally bought a beautiful house in a peaceful area, and everything goes great, but… Wait…
There is literally nothing INSIDE a house, meaning that you need to buy furniture, remodel or repair it, but you already spent your whole salary (and much more) on the house! And here comes cash out refinance canada.
How Does a Cash-Out Refinance Work?
Let`s first decide what does cash out refinance canada means. According to the title it deals with cash, that is clear, but where do you get it? Here comes one of the economical rules, you have real or personal property and it can work for you because you have invested your finances in it.
Now we`ll try to explain the easiest way possible — you need to find a company, which will provide you with cash, and you can either use it for buying new house appliances (refreshments, new furniture, etc.) or simply pay off your monthly payments. You can even do both options at once! That is what refinance is for.
Let’s say your home is worth 500.000$ and you owe 250.000$ on it. That means you still owe half of the overall price and of the mortgage but already own 50% of the equity. It is a capital that you have invested and can use a part of it. A glass is half-empty, or is it half-full? In this case, you should be able to apply for a cash-out refinance. If you wanted to take out 50.000$, you would refinance for 300.000$ (the original 250.000$ you still owe plus the additional 50.000$ taken out).
Why Are Cash-Out Refinances So Great?
You probably already know one of the pros of having a refinance — getting cheaper and a lower rate on monthly payments. But there are more..! Here we`ll name a few:
- Longer repayment periods
- Another advantage of a refinance is that it provides new and bigger capital that can be used to buy new appliances and furniture, so basically, this money is for you to use, so go on and buy something nice! But think twice before buying anything unnecessary
- A last good reason to get into cash out refinance canada is buying a bigger house. This option has several benefits like the previous ones, but also it allows you to buy something better than what you would buy in the market, in our case this means a better house in the same price range
For example in Toronto you can find 2-story townhouses in the 200.000 — 250.000$ price range which are very nice for family life (they usually have 2-3 bedrooms and 1 bathroom). If you`re getting 3 bedrooms and 3 bathrooms for 250.000 — 350.000$ it will be nicer than one bedroom and 1 bathroom house. But wait, there is a flip side of it all.
What Are the Disadvantages of a Cash-Out Refinance?
Most of you already know that cash out refinance canada has some bad sides, like everything on Earth has. The first and most important thing is that building equity in your property costs time and money (it’s not money you`re going to spend, but the value of your home will rise over time), and you might not get anything back if some financial crisis happens (like it did in 2008-2009). All you will get is a small house with nothing inside.
But there are other disadvantages. We`ll name a few:
- You need a good credit score to get it. Most people don’t pay attention to this, but it is very important. It needs to be at least 700 to get refinanced with a cheap mortgage rate or a cheap credit line with Cash-Out Refinance in Toronto. If you have a bad score, you will end up paying more for Cash-Out Refinance!
- No money-back guarantee if something happens.
- Risk of losing your house. If you will have financial problems and will not have the possibility to pay high mortgage interest a bank can take away your house because basically, a cash out refinance canada is a loan secured by real estate but with a lot of different legal subtleties.
- You need to have at least 20% equity in your home, which means you can’t owe more than 80% of the value of your home. That can be a really tough task for people who already has a mortgage, especially with a down payment of only 5%
Cash-Out Refinancing Alternatives
A cash out refinance canada can help you if you need a huge sum of money and do not have time to gain them by working hard. For example, you need an urgent operation or finally decide to repair and rebuild your house, and want to buy new furniture, like in the example from the beginning of the article, it doesn’t really matter.
But imagine that your credit score is not high enough to choose a cash-out option. As alternatives you can choose:
- MERS or MLS-Metropolitan Mortgage Recourse. It is usually used by people who have a bad credit score, but they already have enough information about the house they are buying. The only way to reduce the interest rate is to pay off mortgage principal, so you will lose money if you don’t make your payments on time.
- Home Equity Line of Credit (HELOC). You`ve already used your house as collateral, but with a HELOC loan, there is no need for any extra credits and paperwork like in Cash-Out Refinancing (although there will be some paperwork and credit checks). If you have a good credit score you can get a cheap HELOC (5% to 15%) and pay it off monthly with no interest. The only catch is that the loan has to be paid back in time.
- Standard Mortgage Loan. If you have a good credit score and need a big sum of money, go for this loan and pay it off monthly with a low-interest rate (4% to 6%). It will be suitable for you only if you want to buy another house, There are some restrictions like you need 2 years to fix your house up and document all the changes, then apply for refinancing; also there is a minimum downpayment of 5%, additional charges like insurance and property taxes may add additional costs.
It seems that Cash-Out Refinance Canada is not the best choice for everyone. Remember that you should always know what you are getting into before applying for the cash out refinance. If a lender does not explain in a clear way all the terms of your loan in a written contract, always re-negotiate these terms with your loan officer until everything is clear and you understand them completely.