Feb 14, 2022
Published by Derek Timmons

The Canadian Guide to Cash-Out Refinance

What is a cash-out refinance? In essence, cash-out refinance is an application for a bigger loan in exchange for immediate cash. With this type of refinancing, you’re borrowing cash from your lender and asking them to allow you to pay your debt through adding the borrowed amount to your mortgage.

People apply for cash-out refinancing for several reasons. Some of these include paying tuition fees, high-interest debts, home renovations, or new investments. Most of the time, borrowers need immediate cash to pay off something important.

You can borrow up to 80% of your home’s current value minus the remaining balance of your mortgage. This is also called home equity.

cash out refinance example

In this example, you can cash out a total of up to $80,000. Just keep in mind that your new mortgage will amount to $480,000 plus interest.

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Benefits of Cash-Out Refinance

Immediate Cash-Out

Once your application for cash-out refinancing is approved, the amount you’re allowed to borrow is immediately deposited into your account. You can then use the money as you wish.

Still, make sure you’re spending it on something that’s necessary or something that will help improve your current financial situation.

Lower Interest Rates and Constant Payments

If the rates have dropped since you first applied for your mortgage, cash-out refinancing can help you have lower interest rates. In turn, you could also get lower monthly payments.

Since most cash-out refinances work on a fixed rate, you’ll be paying the same amount for the whole duration of your mortgage. There are no surprises compared to mortgages with variable rates. If applied at the right time, fixed-rate mortgages can also give you lower interest rates overall.

Get in touch with a realtor to help you find the best time to apply for a cash-out refinance mortgage.

Freedom to Choose Payment Terms

Because applying for a cash-out refinance is the same as applying for a new mortgage, you once again get the freedom to set your payment terms.

If your financial situation has changed since you first applied for a mortgage, this might be a good time to update your terms to something that’s more favorable to you.

Set the amount you’ll be paying monthly and the duration with which you’ll be paying for your new mortgage. Once your cash-out refinance application gets approved, these new terms will kick in and be more convenient for you.

Drawbacks of Cash-Out Refinance

Additional Expenses and Duration

Cash-out refinance isn’t free. Applying for a new mortgage incurs closing costs that are about 3–6% of the total price of your home. These include home appraisals and inspections done by the lender as part of processing your loan application.

Applying for a cash-out refinance basically adds to your current mortgage. You’ll have to pay a larger amount or for a longer period of time. In most cases, it’s both.

Interest Rates

If cash-out refinance is done at a time when rates are high, you’ll end up paying more than the interest rates for your current mortgage. This might also make your mortgage harder to afford and pay off.

This is why it’s important to discuss with a realtor to know whether cash-out refinance is right for you.

Risk of Foreclosure

Because cash-out refinance isn’t always the right way to go, you risk having your home up for foreclosure. Some people get approved for a cash-out refinance but end up being unable to pay for their new mortgage, especially if the cash-out was used for unnecessary expenses or failed investments.

Financial conditions may change anytime, so you might actually end up defaulting on your mortgage. It would be best if you plan for things like this in advance, even before applying for cash-out refinance, so that it doesn’t take you by surprise later on.

If you’re not confident with being able to handle a cash-out refinance mortgage but need the money for an urgent expense, consider selling your home and purchasing a rental property so that you won’t have to deal with mortgages.

The Bottom Line

Like all other refinancing methods, cash-out refinance has its advantages and risks. Seek professional advice before making any moves to lessen your risk of choosing an unfavorable option and losing your hard-earned money.

As much as possible, use cash-out refinance to pay off a debt in which the repayment would lessen your monthly expenses. It’s also good for investing in something that would increase your income. People also sometimes use cash-out refinance to pay for home renovations that increase their home value.

Remember that there are other options to go for such as home equity line of credit and home equity loans. Make sure you do some research to find the best choice for you before buying a home.

Again, here are the things to take note of when applying for a cash-out refinance in Canada:

  • It provides immediate cash out that is helpful if you have an urgent expense to take care of.
  • It could yield lower interest rates than your current mortgage. However, it could also cause you to pay more. Ask for professional help from a realtor to make sure you’re doing it at the right time.
  • You can set new payment terms for your new mortgage. This helps you manage your finances better.
  • Cash-out refinance adds to your current mortgage. Make sure you account for the changes that this might bring to your finances.
  • You risk losing your home to foreclosure when you start defaulting on your new mortgage. Even before applying for a cash-out refinance, prepare what you need to make sure you’ll be able to handle it.
Written By
Founder

Derek Timmons

Derek is a top performing REALTOR® in Airdrie, Alberta, Canada. Aside from knowing the market, he uses his knowledge and experience in construction to help clients understand exactly what they're in for when buying and selling real estate.