Own U.S. Property? Here’s How to Refinance Your U.S. House

If you own real estate in the U.S. and are looking to take advantage of the equity you may have built up in the property, refinancing can help you access U.S. funds. These steps can show you how to refinance a U.S. home and why refinancing may be a good move for you now.

While the real estate market in the U.S. has fluctuated over the last few years, particularly amid the pandemic and a rising interest rate environment, home values in snowbird hotspots have continued to rise. Homes in Florida, in particular, have retained value, even with recent volatility. If you’ve owned a home in the U.S. for at least five years, chances are you’ve built up significant equity with a rise in market prices across snowbird destinations. 

One of the benefits of having built-up equity is that it offers some financial flexibility. Through refinancing or a Home Equity Line of Credit, for instance, you can access that equity in order to achieve a range of goals.

If you’re considering whether to refinance, but you’re not sure where to start, these steps can show you how to refinance your house – and make the most of the equity that’s built up over time.

1.  Get to know the types of refinancing available

When looking at how to refinance your U.S. home, it’s important to start with the fundamentals and understand what refinancing is and what your options are. To put it simply, refinancing is the process of replacing an existing mortgage with a new one. While there are several types of refinancing, there are two common types that are by far the most common, which will be covered here.  The type you choose will depend on what your goals are.

Types of refinancing:

Rate-and-term refinance

This option is for homeowners who don’t want to cash out but rather want to lower their interest rate and/or change the terms of their existing mortgage. With talk of interest rates coming down in the near future, this option could be appealing to those who are currently at a higher rate.

With rate-and-term refinancing, your new mortgage will be amortized over 30 years, as opposed to the typical 25 year maximum in Canada. It will also come with a new interest rate. Your regular mortgage payments would therefore reflect the new mortgage amount, interest rate and amortization.

Cash-out refinance

As the name suggests, a cash-out refinance allows you to pull money out of your mortgage. This process involves tapping into your equity and taking out a larger mortgage than what you currently owe. You receive the difference as a lump sum of cash that you can use for other purposes.

How cash-out refinancing works: 

• Say your current mortgage amount is $300,000^*

• And your current home value is $450,000

Because you may be able to borrow as much as 80 per cent of your home’s value, given the figures above, you would be in a position to pull $60,000 out of your home by refinancing.

Here’s a breakdown of the calculation:

• 80 per cent of $450,000 is $360,000. The difference between what you can borrow ($360,000) and what you owe ($300,000) is $60,000.

• This cash-out amount would then be added to the current mortgage balance of $300,000, giving you a new total balance of $360,000 — and $60,000 in U.S. cash in hand.

Remember, your old mortgage will be replaced by a new one of $360,000, which would come with a new amortization period (up to 30 years) and a new interest rate. What could this mean for your mortgage payments? The scenario above may actually mean you can take $60,000 of cash out of your home without an increase in monthly payments, due to a fresh amortization period and potentially lower rates.

2. Understand how you can benefit from a refinance 

Before starting the process of refinancing your U.S. house, it’s worth understanding what you’ll get out of it.

With a rate-and-term refinance, you could benefit from better cash flow, given you can sign on for a longer amortization period. By spreading out your mortgage payments over a longer period of time, each payment would be lower than before the refinance.

With a cash-out refinance, you can pull money out of your home and get a lump sum to use however you wish. Some popular ways to use cash from a refinance include:

• Home renovations: One of the most common reasons to refinance is to access funds for improvements to an existing property.  In effect, you’re using your home’s equity to improve its value. And, you get to enjoy a new kitchen, backyard, bathroom… or whatever you choose to upgrade!

• Move money back to Canada: With the U.S. dollar strong compared to the Canadian loonie, the money you pull out of your U.S. house can go a long way back home. Whether you have a child preparing for College or University, renovations to take care of in your Canadian home or lingering debt you’d like to erase once and for all, U.S. funds can help you cover your Canadian obligations.

• Cover U.S. expenses: As a Canadian spending time south of the border, you likely have to exchange money from Canada in order to fund your cross-border lifestyle. Unfortunately, you get hit with foreign exchange costs every time you do – and must swallow the unfavourable exchange rate that’s been dogging Canadians for years. By accessing U.S. cash through your U.S. property, you can bypass foreign exchange costs to cover day-to-day expenses such as homeowner fees, groceries, fuel expenses, home maintenance and more. Plus, having a lump sum of U.S. cash on hand frees you from monitoring currency exchange rates and trying to time the market for your next exchange. 

3. Determine how much equity you have

The value of your home equity is the difference between the current market value of your home and the amount you owe on all loans secured by your house – such as your mortgage and any secured lines of credit. For example, if your home is worth $700,000 and you owe $150,000 on your mortgage, you have $550,000 in home equity.

It’s worth doing some of your own research before starting the process, just to ensure what you think your home is worth is in fact aligned with the real market value of your home. Getting a home appraisal is usually a condition of the refinancing process, but looking at comparable (and recent) home sales in your neighbourhood and determining a realistic value is a great first step. It can give you an idea of how much equity you would be able to pull from your home – as well as peace of mind that this is a good move for you.

Keep in mind, a general rule of thumb is that you’ll need to have at least 20 per cent equity in your home to qualify for a new mortgage, as lenders typically only allow you to borrow up to 80 per cent of the equity in your home.  

4. Dig into the details – eligibility, cost and paperwork

With some of the bigger questions answered, now is a good time to get into the nitty-gritty and determine if refinancing makes sense for you.

Eligibility

For instance, before you move forward with a refinance, it’s a good idea to check that you’re in good enough financial shape to qualify for a new mortgage. You can check your credit score for free, and a cross-border mortgage specialist can help you determine if you would qualify for a mortgage. They can also help you decide if refinancing is a good move for you at this point in time. 

Costs

Closing costs apply to a refinance just as they do to a home purchase, and they can range between two and five per cent of your mortgage amount. Because of the costs associated with refinancing a mortgage, consider how everything shakes out financially before you decide to move ahead. Will either lower mortgage payments and/or a lump sum of cash be enough to offset the associated closing costs? Chances are they will, especially if your home has gone up in value or you’re drawing out your amortization at a fast enough rate to have a meaningful impact on your monthly costs. All the same, it’s important to understand what your closing costs will be, to budget for them and crunch the numbers to ensure refinancing still makes sense.  

Paperwork

Since refinancing involves creating a new mortgage, you will go through an approval process that may feel similar to when you secured your mortgage the first time around. This means there is some paperwork required – you’ll need to provide information such as proof of income, employment history, and account statements. And like with a new purchase, the home you are refinancing will be subject to an appraisal in order to confirm its current market value.

5. Compare your options: selling versus refinancing  

Depending on the reasons behind your refinance decision, you may also be weighing the option of selling your U.S. home. For instance, if cash flow is a concern or if you have significant financial obligations back in Canada, you may be wondering if it’s better to sell versus refinance. If you’re in the middle of this pros and cons list, here are some factors to consider:

• Whether your home needs work. If you haven’t done any upgrades on your U.S. property for a while, you may need to spend some time and money on your home before you put it on the market. As you assess your situation, you may determine you’re better off to refinance and keep your home for now.

• Home insurance costs. In some parts of the U.S., home insurance costs have risen considerably and are having an impact on affordability. Looking at your budget as a whole can help you decide what works best for you right now.

• Tax implications. If you owned your property for at least a year and sell it for more than you paid for it, you’ll need to pay capital gains tax on the difference – regardless of where you live and normally pay tax. Learn more about your tax obligations here – and consider speaking with financial, tax, legal and other professional advisors for advice on your individual situation to understand exactly what tax implications you may encounter should you decide to sell.    

6. Work with a lender who can make it easy 

Refinancing your U.S. home as a Canadian can be a smart financial move, whether you’re looking to reduce mortgage payments, access U.S. cash for your day-to-day expenses or fund other goals you may have. But it’s an important decision that can have a long-term impact on your financial future, including your retirement planning. Speaking with a U.S. lender who understands Canadians and the intricacies of cross-border mortgage solutions can help you make a decision that’s right for you. And, the right partner can help guide you through the process and the paperwork that comes with refinancing.  

Thinking About Selling Your U.S. Property?

Leveraging your U.S. home equity can provide you access to U.S. dollars without having to sell your U.S. property

Learn more

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