06/03/2020

A home purchase in the U.S. is attractive for Canadian cross-border buyers – whether they are looking for a primary residence, vacation home or investment property. While there may be many benefits that come with refinancing your mortgage, such as access to U.S. cash and perhaps the opportunity to lower your interest rate or payment. Here some key questions you should consider carefully before you refinance your U.S. mortgage.

1. Why do you want to refinance?

Are you looking to take advantage of a lower interest rate, or are you interested in taking equity out of your home to pay for renovations, a vacation, or your cross-border lifestyle? Having a clear idea of why you want to refinance will help address your financial need.

2. How much equity do I have in my home?

· A general rule of thumb is that you’ll need to have at least 20 per cent equity your home to qualify for a new mortgage. That 20 per cent is the amount you own outright. The rest is the amount you still owe to your lender. Usually, lenders only allow you to borrow up to 80 per cent of the equity in your home.

· Beyond your mortgage balance, you want to also consider the real market value of your home. You may think it’s worth $400,000, but would a home appraiser agree with you? Getting a home appraisal is generally a condition of a refinance, but before you begin the process, do your own research. Look at comparable recent home sales in your neighbourhood. This will give you an idea of what an appraiser might decide is the current value your home.

3. Have I owned my home long enough?

With every mortgage payment, one portion of what you pay goes towards interest, and the other portion goes towards paying down your balance. In the early months and years of your mortgage, more of your payments go towards the interest, with the ratio gradually shifting over time, it towards the end of your mortgage, most of your payment is going toward your principal.

By refinancing early on in your mortgage, your balance hasn’t had the chance to decrease by any significant amount. And if you continue to refinance every few years, your balance won’t really decrease — leaving you with a long road ahead to becoming mortgage-free.

4. Will I qualify for a new mortgage?

Financial situations change as job or life changes. During certain points of your life, money may become tighter, and your level of debt might increase.

Before you move forward with a refinance, it’s a good idea to check your credit score to ensure it’s healthy enough to qualify for a new mortgage and at a rate that remains attractive for you. Find a cross-border mortgage adviser to help you determine your eligibility for a mortgage, and decide if the timing is right for you.

5. Is it worth the closing costs?

Because there are closing costs associated with refinancing a mortgage, consider how they may impact your loan. Will a lower payment offset your closing costs?

If your home has gone up in value, or you’re refinancing during a period of lower interest rates, the equity you are tapping into and/or the money you’re saving on a lower interest rate may more than offset these costs. The important thing is to understand what your closing costs will be, and do the maths to ensure refinancing is still a good financial move for you.

Consider how many months it will take to offset these costs. Do you plan to stay in the home long enough to fully get the benefit of a reduced rate or payment? If you’re planning on keeping the home longer than that, it may pay for itself.

Home refinancing can be a great way to reduce your mortgage payments or leverage the value of your home to cover key expenses or pay off debt. Just be sure to consider the reasons, realities and costs of refinancing in advance.