Three high-interest balances folded into one payment, with the penalty checked first.
SampleIllustration only, no figures
When a refinance makes sense
A refinance replaces your mortgage with a new one, usually a larger one, before or at the end of its term. Lenders will go up to a set share of the home's appraised value, so what you can take out depends on what the home is worth now and what you still owe.
It tends to make sense when:
- High-interest debt is costing more each month than the mortgage would
- A renovation will add to the home's value, or let you stay longer
- You need the down payment for a rental or a second property
- The payment has to come down, and a longer amortization, the number of years the mortgage is spread over, is the honest way to do it
It tends not to when the penalty on the current mortgage eats the saving, when the debt would be run up again, or when your term ends within a year and a switch at maturity would do the same job without a penalty. We run the numbers both ways and show you.
Break penalties, in plain words
Leaving a mortgage before the end of its term costs a penalty, and the formula depends on the kind of mortgage. On a variable-rate mortgage it is usually three months of interest. On a fixed-rate mortgage it is the greater of three months of interest and something called the interest rate differential.
The differential is the lender's estimate of the interest it loses by letting you go: the gap between your rate and the rate it could charge today for the time left in your term, applied to your balance. The bigger the gap and the longer the time left, the bigger the penalty. How a lender chooses the comparison rate matters a great deal. Some use their posted rates, which makes the penalty larger; some use the rate you actually pay.
Before anything else, we get the penalty in writing from your current lender and put it beside what the refinance would save. Sometimes the answer is to blend the new money into the existing mortgage with your current lender, sometimes to wait for maturity, the end of your term, and sometimes the saving covers the penalty many times over. You see all three.
Consolidating high-interest debt
The new mortgage pays out the cards, the line of credit or the car loan at the lawyer's office, and you are left with one payment at a mortgage rate. The monthly relief is real. Two things to go in knowing.
First, you have moved short debt onto a long amortization. Spread over twenty-five years, even a low rate adds up, so we set the payment, or a prepayment plan, so that the consolidated part is gone in a few years rather than at the end of the mortgage.
Second, the lender will usually require the debts to be paid directly from the proceeds, and may ask that the accounts be closed. That is a feature, not a hurdle; it is what stops the balances coming back.
Equity take-out
Three things people use the equity for
The same refinance, with different paperwork for each.
A renovation
A kitchen, a suite, an addition. Lenders may ask for quotes, and a larger project can be set up as a construction loan that advances in stages as the work is done.
Construction financing →A second property
Taking out the down payment for a rental or a cabin, then arranging the second mortgage so the two applications support each other instead of competing.
Investment property →A business, or a child's first home
Capital for a business you own, or a gift toward a child's down payment. Both are common; both need the paper trail the lender expects to see.
Business lending →What a refinance involves
A full application, the same as a purchase: income, credit and the property. The lender will usually order an appraisal to confirm the value, and you pay for it. A lawyer or notary registers the new mortgage and pays out the old one, and any debts being consolidated; some lenders use a title company for this, which costs less.
If you are staying with your current lender and only adding money, it can be simpler and cheaper. If you are moving lenders, the new one may cover some of the costs. Either way you see the list, with who pays what, before you decide.
Bring your current mortgage statement with the balance, rate and maturity date, the usual income documents, statements for every debt you want paid out, and quotes if it is a renovation. The document checklist →
How much can I take out?
Up to a set share of the home's appraised value, less what you owe. The appraisal decides the first number, and the lender confirms the share; we give you a range upfront.
Does a refinance reset my amortization?
It can, and that is often the point when the goal is a lower payment. If the goal is to pay off debt, we keep the amortization short, or set prepayments, so the consolidated part does not run for twenty-five years.
Can I refinance to buy a rental?
Yes, the equity becomes the down payment, and the rental is a second application with rules of its own. We arrange the two in the order that makes both work.
Bring your current mortgage statement and the list of debts, and we will put the penalty beside the saving in writing. Book a 20-minute call →