Rising mortgage rates are a concern to many. Particularly those who are in variable rate mortgages with an adjustable payment (ARM), or for those who have a mortgage that is coming up for renewal. While everyone had to pass the mortgage stress test to ensure they would still qualify with higher payments in a rising rate environment, watching your monthly cash flow shrink considerably doesn’t make it any easier.

Some may be worried about their ability to pay their bills on time, making their next mortgage payment, or just concerned about their financial future in general. Not to mention, the additional stress a tight financial situation can place on a relationship or marriage.

If you currently own a property with equity, then there may be opportunity for you to turn that equity in cash. This can help alleviate financial stress, allowing you to live your life without worrying about how you’re going to make your next mortgage payment.

There are three ways to access your home equity.  

  1. Refinance your mortgage
  2. Add a HELOC
  3. Add a second mortgage

 

Refinance

The first option is to refinance your mortgage, which basically means you are replacing it with a new one. There are two different ways of refinancing:

  1. Blended rate
  2. Break the mortgage entirely

 

Blended rate mortgage

A blended rate allows you to keep your current rate intact, while avoiding the penalty to break your mortgage. The new money would then be added at the current mortgage rate, which would then get blended together with the existing mortgage for a single rate and payment.

For example, let’s say you owe $600,000 at 2.49% with 18 months remaining.  You need to borrow an additional $100,000 at your current lender’s 5 year fixed rate of 5.49%. Your current rate would remain intact until your renewal date of February 25th. After this date, the entire amount would be calculated at 5.49%. This would all get blended together to give you single rate and payment. In this case, the blended rate would be roughly 4.72% given that your low rate expires after 18 months.

Not every lender offers blended rate mortgages for refinancing, which could mean that your only refinancing option may be to break the mortgage and pay the penalty. Depending on your situation, adding a HELOC or second mortgage may be a better choice. It all comes down to which option is going to be most cost effective.

Blended rates are available with fixed mortgage rates only. If you have a variable rate mortgage, then your only option will be to break the mortgage and pay the penalty.

 

Break the mortgage entirely

When breaking the mortgage, you would be replacing it with a new one for the full amount required. This means the full penalty would apply and you would also lose your current rate.

 

Add a HELOC

Adding a Home Equity Line of Credit (HELOC) will allow you to keep your current mortgage rate intact. The majority of mortgage lenders do not offer HELOCs, which just means you would need to apply with a different one. While lenders offering HELOCs behind other lender’s mortgages are few and far between, there are options that exist which can be done with minimal set up cost. The rate on a HELOC is usually prime +0.50% (currently 6.95%). I wouldn’t plan on shopping around here as lenders who offer HELOCs behind other lenders are few and far between. With such limited options, the odds of finding a better deal are slim to none. Even if you did find another lender willing to offer it, the rate and set up costs would almost certainly be higher.

 

Add a Second Mortgage

Adding a second mortgage will also allow you to keep your current mortgage intact. However, the vast majority of lenders do not offer second mortgages. With the exception of private mortgages, which I’ll be talking about shortly, second mortgages are only offered if the lender also holds your current mortgage (first mortgage).

When your first (current) mortgage comes up for renewal, you can then refinance both mortgages so you can go back to having only one. It’s almost certain that your second mortgage will have a different maturity date, which means that you would need to pay the penalty to break it. As second mortgages are usually smaller, the penalty likely would be as well.

 

How Much Will You Qualify For?

Regardless of whether you are looking to add a second mortgage or refinance, you can borrow up to a maximum of 80% of the property value. The same limit applies when adding a HELOC providing that the HELOC portion doesn’t exceed 65% of the property value. But the HELOC and mortgage together can go up to a maximum of 80%. 

As with any new mortgage, you’ll need to qualify based on credit and income. This means you’ll need to pass the mortgage stress test, which basically means that you need to qualify as if your payments were calculated at a higher rate. If adding a HELOC or second mortgage, then the stress test will only apply to the new money being added. The actual payment on the existing mortgage would be used for qualification, which can help you to qualify for more money than a refinance.

 

What If You Don’t Qualify?

Given that mortgage qualification rates are now in the 7% range (mortgage stress test rate), people are qualifying for much less than they were in the past. If you’re not able to qualify, then they only option to take out equity would be to add a second mortgage with a private lender. Private lenders can be smaller institutions, or they can be private individuals.

The good news about private second mortgages is that they are pretty easy to qualify for. As long as you have at least 20% equity in the property (after the second mortgage is added) and you have the capacity to repay the loan, then approval is almost guaranteed. In many cases, few documents are required and the process is relatively easy. Approval is based more on the property itself and its location, and not so much on the borrower. Even if your credit is less than favourable, private lenders are still generally okay with lending you the money providing there is adequate equity in the property.

The bad news is that they are more expensive. Private second mortgages are usually in the range of 10-12%, plus you’ll also pay a broker and lender fee which can vary depending on the loan amount. As always, we’ll do everything we can to keep your overall costs down as much as possible. While the rate sounds high, it’s still better than paying 20-30%, which is the rate on most credit cards.

 

Conclusion

It can be easy to become confused or overwhelmed from all the different options. But don’t worry, as that’s what we’re here for. We’d be happy to assess your situation and find the most cost-effective solution for your needs.  The best choice might not necessarily be the one with the lowest rate, but the one that will save you the most money over time. Everyone’s situation can be a bit different.