6 key questions to ask yourself before refinancing your U.S. mortgage

Refinancing your U.S. home can offer a range of benefits — from accessing U.S. cash to potentially lowering your interest rate or monthly mortgage payments. Before you move ahead, it’s important to understand what refinancing could mean for your financial situation. If you’re thinking about whether it’s the right time to refinance, start by asking yourself these six questions to make sure you’re making an informed decision.

1. Why do I want to refinance?

Given the strength of the U.S. dollar compared to the Loonie, some Canadians with U.S. properties are looking at refinancing to take advantage of the favourable exchange rate. Accessing a lump sum of U.S. cash can go a long way back home and give you the opportunity to cover financial goals that are important to you — from renovating your Canadian home to paying for a child’s education to funding a bucket list vacation.

Refinancing can also give you the opportunity to stretch out your amortization period, allowing you to spread your mortgage payments over a longer period of time, reducing your monthly mortgage costs and freeing up cash flow. Or, if you locked into your mortgage when rates were higher, refinancing could present the opportunity to move into a lower rate and pay less interest over the life of your mortgage.

Having a clear idea of why you want to refinance — and what you plan to do with the cash — is an important first step. This will help you determine whether refinancing your U.S. mortgage will help address a financial need or reach a meaningful goal.

2. How much equity do I have in my home?

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. That 20 per cent is the amount you own outright, while the rest is the amount you still owe to your lender. Usually, lenders only allow you to borrow up to 80 per cent of the equity in your home.

Beyond your mortgage balance, you also want to consider the real market value of your home. You may think it’s worth $300,000, but would a home appraiser say the same? Getting a home appraisal is generally a condition of a refinance, but before you begin the process, do your own research. Look at comparable recent home sales in your neighbourhood. This will give you a ballpark figure of what an appraiser might decide is the current value of your home, and in turn let you calculate how much equity you have.

3. Have I owned my home long enough?

With every mortgage payment, one portion of what you pay goes towards interest, and the other portion goes towards paying down your balance. In the early months and years of your mortgage, more of your payment goes towards the interest, with the ratio gradually shifting over time — so that towards the end of your mortgage, most of your payment is going to your principal.

If you refinance early on in your mortgage, your balance won’t have the chance to decrease by any significant amount. Understanding how much principal you’ve paid so far — and how much is left — can help you determine if it makes sense to refinance now.

4. Will I qualify for a new mortgage?

Financial situations change as life evolves. During certain points of your life, money may become tighter, and your level of debt might increase.

Before you move forward with a refinance, it’s a good idea to check your credit score to ensure it’s healthy enough to qualify for a new mortgage — and at a rate that remains attractive for you. Speaking with a cross-border mortgage specialist can help you determine your eligibility for a mortgage and decide if the timing is right for you.

5. Is it worth the closing costs?

Refinancing comes with closing costs, so it’s important to understand how they’ll factor into the bigger picture. If you’re taking equity out as cash, will the amount left over after covering those costs still make it worthwhile? If you’re refinancing to reduce your rate or adjust your amortization, will the savings offset the upfront expense?

As you crunch the numbers, consider how long it will take to break even. If you plan to keep the property beyond that point, the refinance could pay off. If not, it might not make financial sense.

The key is to be clear on what your closing costs will be, budget accordingly, and make sure the benefits of refinancing outweigh the expense.

6. Does a Home Equity Line of Credit (HELOC) make more sense?

Refinancing isn’t the only way to access the equity in your U.S. home. If your goal is to tap into funds gradually, a home equity line of credit (HELOC) might be a better fit. While refinancing gives you a lump sum up front, a HELOC provides access to a revolving line of credit, letting you draw from it as needed.

With a HELOC, you’re given a set credit limit (typically up to 80% of your home’s value), and you only pay interest on the amount you use. As you repay what you borrow, those funds become available again.

So, if you don’t need all the cash at once but want the flexibility to access it over time, a HELOC could offer a more efficient way to put your U.S. home equity to work.

Home refinancing can be a great way to access U.S. cash, reduce your mortgage payments or save on interest. Just be sure to consider the reasons, realities and costs of refinancing – as well as the other options available to you – before you make your move.