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September 2013 - Options for solving financial problem part II – Mortgage refinancing (equity take out)

Options for solving financial problem part II – Mortgage refinancing (equity take out)

☳ by Adam Aspilla

The second option in solving a financial problem is Mortgage Refinancing, which is taking the equity of your house by increasing your existing mortgage or taking a second mortgage. 

There are two types of mortgages: conventional mortgage and high ratio mortgage. 

In a conventional mortgage, a bank can give you up to 80% of the value of your house, without paying a mortgage insurance premium. The amortization period is up to 25 years.  Term of the mortgage is from six months to five years or more.

While in a high ratio mortgage, it is a mortgage where the amount you borrow exceeds above 80% of the value of your house. 

Since there is a risk that a lender may not get 100% of the principal and interest on the amount you borrowed in the event you default on your payments that would lead to a power of sale action, you are required to purchase an insurance policy where you have to pay a premium of about 3% of the amount of the mortgage. 

The insurance coverage is to protect the lender in case your house is sold through power of sale, and the funds from the proceeds of sale is not enough to pay the lender in full of the balance and interest of your mortgage. Should this happens, the insurance company will pay the lender for the deficiency. 

There are three basic lenders for a mortgage. The primary lenders are banks and trust companies. If you have a good credit rating, and decent income, get your mortgage from a primary lender, for it can give you a much lower interest compared to the interest you can get from secondary lenders. 

However, if your income or credit rating does not meet the standard requirements of primary lenders, you have to go to secondary lenders.

Secondary lenders are finance companies. They are relatively lax on their credit standard requirements, but, you have to pay a higher interest rate by about two or more percentage points. 

Should you not meet the requirements of secondary lenders, your next source is to go to alternative lenders who are private lenders (equity lenders), which you have to think twice for it is very expensive. Their interest rate is too high, and a lender will charge a lender’s fee or bonus, and other charges aside from a broker’s fee if you are dealing with a mortgage broker.

The advantage of consolidating your debts using the equity of your house is your monthly payment. It is very low compared to your payment in a conventional loan without using the equity of your house.  It is low for the amortization period is up to 25 years, whereas in a conventional loan without using the equity of your house, the amortization period is usually only up to five years or 60 months.

Moreover, should you wish to reduce the amortization period, you could pay more than the minimum mortgage monthly payments up to 20% yearly of the balance of your mortgage. This is called Prepayment Privilege. It varies from bank to bank. 

If you cannot qualify for Loan Consolidation (discussed in the last issue), and Mortgage refinancing for whatever reason above mentioned, what to do then?

You have to consider other options like: Liquidation of Assets, Debt Settlement (Negotiation), Credit Counseling, Consumer Proposal, and Bankruptcy that the writer will discuss in succeeding issues.



Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.