Accessing the equity you’ve built up in your home can be done in multiple ways. You can choose cash-out refinancing on your mortgage or take a second mortgage. Both are important to know so that you can decide the best way to finance some of your goals.
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What is a cash-out mortgage refinance?
When you refinance your mortgage, you can increase the size of the mortgage loan you’ve taken out with your lender. Doing so increases the money you owe the lender, but the difference between your previous mortgage amount and the new one can be withdrawn as cash. This is known as a cash-out refinance in Canada.
It’s a great way to use your home equity to borrow money on short notice. When used properly, it can help you get the funds you need to make a financial investment that pays out more than you put in. However, cash-out refinances in Canada should only be used once you’ve understood what they entail.
How does mortgage refinancing work in Canada?
A standard mortgage refinance involves renegotiating the terms of your current mortgage with your lender. It can be done at the end of your mortgage term or at any time in between, and you can change various features, such as the interest rate, the size of the mortgage and mortgage term.
A cash-out refinance works the same way, except it focuses on adjusting the mortgage amount. This makes them a little special, and not all lenders might be willing to offer a cash-out refinance in Canada.
Pros and cons of cash-out refinancing
| Pros | |
| Access equity without selling | Usually, you can only access the accumulated value in home equity through appreciation if you make a sale, but selling is not always the best option unless you have another property to move into. |
| Comparatively lower interest rates | Since it’s tied to your mortgage, a cash-out refinance comes with lower interest rates on average, which can save you money in the long run. |
| Payment toward one mortgage | You may be adding to the total outstanding balance in a cash-out refinancing, but it’s still only one mortgage to manage. |
| Cons | |
| New mortgage contract | With a cash-out refinance, you add to the total debt you owe your lender. This means you need to be very confident in your ability to repay the extra amount you’re getting. |
| Offers dependent on the economy | If mortgage rates change, your mortgage refinance contract will reflect the market conditions. Mortgage refinance rates may be higher if rates have risen since your previous mortgage contract. |
| Closing costs and additional fees | Legal fees or mortgage discharge fees can be part of the additional costs involved with refinancing your mortgage, so you’ll have to budget accordingly. |
Relation between second mortgages and a cash-out refinance
The concepts of cash-out refinancing and second mortgages are similar, and they can feel like the same financial tool at a glance. They both depend on how much home equity you have built against your mortgage.
The main difference is that in cash-out refinance in Canada, you’re essentially trading your old mortgage amount for a new mortgage contract with a more significant total amount. Refinancing lets you replace your existing mortgage contract and withdraw, while second mortgages are a separate agreement that allows you to borrow from your equity while keeping your current mortgage contract.
Getting a cash-out or a second mortgage in Canada will first involve lenders comparing the appraised value of your home against your outstanding mortgage balance. Based on this, they can provide you with the estimated amount they can offer. This means you must get a home appraisal before you can get a cash advance in Canada.
Second mortgages vs cash-out refinance
Cash-out refinancing and second mortgages are very similar since they both allow you to borrow from your home equity and open new financial opportunities.
| Second mortgage | Cash-out refinance |
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In both cases, you take some of your home equity as collateral. If you fail to repay on time, your lender can repossess your home and sell it to recover their investment. While they present excellent financial solutions, be sure that you can manage a new financial obligation well.
Uses for second mortgages and cash-out refinancing
A cash-out refinance allows you to access your equity like second mortgages do. As home equity financing solutions, you can do any of the following with the funds.
- Home renovations—one of the best uses for a cash-out refinance is to fund home renovations to add more features, functionality, or space to your home. Your home’s appraised value will increase, making this a great way to reinvest your equity value into your home to make more money in the long run.
- Debt consolidation—using the money from a cash-out refinance to pay off higher-interest loans entirely means you can consolidate your debt. At the relatively low-interest rates, you’ll get, you might be able to save thousands of dollars on interest over your repayment period.
- Business investment—if you want to start a business or need the funds for the one you currently own, you can use your home equity. Businesses can require large amounts of capital, which a home equity loan can provide.
Home equity loans from Alpine Credits
A second mortgage is a home equity loan, which you can find at Alpine Credits. Applying for one with Alpine Credits is a simple process and can be broken down into three steps.
- Apply online—you can easily complete an application for a home equity loan from Alpine Credits in just a few minutes. The application won’t affect your credit score and can be done online or through a call.
- Receive loan approval—you can hear back in as little as a few hours when you apply for a home equity loan from Alpine Credits. If you own at least 25% of your home, you’re eligible for a home equity loan.
- Receive the funds—Alpine Credits will provide the funding through direct deposit within a few days of your approval. You can start using it towards your financial goals as soon as you receive it.
Unlike traditional lenders and some cash-out refinance mortgage lenders, your credit score, employment, or age don’t influence the outcome of your loan application at Alpine Credits.
You can determine your home equity by subtracting your outstanding mortgage balance from the appraised value of your home. The most important detail is that you’ve paid off at least 25% of your home’s value (known as the equity value). If you have, you’re eligible for a loan.
You can contact a Financial Solutions Specialist to learn more about how a home equity loan can help you. They are experts who will be able to answer all your questions and help you get started on the application process.
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Frequently Asked Questions
Is a cash-out refinance taxable in Canada?
Cash-out refinancing is not taxable as income in Canada. While this means that you don’t have to pay tax, you also can’t submit it for a refund during tax season.
Does cash-out refinancing hurt your credit?
Any newly acquired financial obligation will decrease your credit score slightly, and refinancing is no exception. However, refinancing your mortgage offers other benefits if you manage your new mortgage payments well. In the end, your credit score may even be higher compared to when you started.
How much equity do I need to refinance with cash out?
The minimum required equity depends on the lender, but they are usually in the range of at least 20-30%. With Alpine Credits, accessing your home equity requires you to own at least 25% of your home.
Is it a good idea to refinance cash out?
While a refinanced mortgage requires additional diligence since it’s an additional loan, it lets you consolidate debt and save money on the interest, as one example. You can also use the additional funding for home renovations or business investments.
