There was a time when dad went to work, mom stayed home to raise 4, 5, 6, 7 (or more) children on dad’s wage, and everyone lived comfortably in a nice house and drove a newer car. Times have sure changed! Inflation has driven costs higher, and it’s driven them faster than our wages have kept up, forcing both mom and dad to work and forcing many households into deeper debt.
To manage this situation, and to prepare for those down-the-road expenses like the kids’ college tuition or like retirement, families use a variety of financial strategies, including budgeting, lines of credit, RRSPs and RESPs, and more. But there’s one financial strategy that is often overlooked yet it’s one of the most powerful strategies: Mortgage refinancing.
When you get a mortgage from a lender, the lender indicates periods of time in the mortgage in which it can be renegotiated and the interest rate adjusted. During these points, people often just accept and sign whatever the lender sends them. However, by using these points to refinance your mortgage you gain a clear advantage.
As you pay down your mortgage, and as your home value rises, you build up equity in the house. Equity is the value that YOU own in your home. Let’s say you bought a $600,000 home with a $100,000 down payment and a $500,000 mortgage. So you started your home ownership with $100,000 in equity. Then, you paid down your mortgage diligently while home values rise. At the next point in your mortgage when you can refinance, you have $300,000 left on your mortgage and your home’s value has risen to $800,000. Therefore, you have $500,000 of equity (The new value minus the amount you still owe).
And you can do a lot with that equity no matter how much it is for your situation:
- Pay off higher interest loans (such as credit card and car loans)
- Use the money to fix up your home
- Use the money to invest in other things (perhaps a business or to help you buy an investment property)
Sure, it might be tempting to splurge a little to enjoy that money – so no one will begrudge you a small indulgence. However, mortgage refinancing gives you access to a large amount of capital and you can make a significant, positive change in your financial situation by using that capital wisely.