For Canadians who own property in the U.S., refinancing can be a smart way to put your home equity to work. Whether you’re looking to lower your mortgage payments, lock in a better rate or access U.S. funds, a cash-out refinance can help you make the most of current market conditions — especially with the U.S. dollar holding strong against the Canadian Loonie. The USD may stretch your purchasing power, both in Canada and the U.S., and create new financial flexibility for you.
Why refinance your mortgage?
There are several potential advantages that come with refinancing your U.S. home.
1. You’ll get a lump sum of U.S. cash
A cash-out refinance lets you tap into your home’s equity and receive a lump sum in U.S. dollars. This may be a strategic way to access funds at a very favourable exchange rate. That money can go a long way when brought back to Canada. You can use it to pay down debt, invest or cover large expenses. Or, you can keep the cash in the U.S. and fund your cross-border lifestyle without having to convert Canadian dollars at a less-than-ideal rate.
2. You benefit from the increased value of your home
If you bought your home several years ago, it has likely increased in value. Refinancing allows you to take advantage of that appreciation today. Even if property values in your area haven’t risen considerably, currency shifts may have worked in your favour. For example, if you purchased your home when the U.S. and Canadian dollars were closer to par, your home may have increased in value purely as a result of the exchange rate.
3. You can reset your mortgage rate or term
If you originally locked in your U.S. mortgage when rates were higher, refinancing today could mean securing a lower rate — helping you pay less interest over the life of your mortgage and/or reduce your monthly payment. Even if rates haven’t dropped, refinancing gives you the opportunity to extend your term, which in turn lowers your payment, freeing up cash flow.
4. You can simplify your finances
Refinancing gives you an opportunity to reassess how your U.S. property fits into your overall financial plan. For example, a cash-out refinance might help you cover large expenses – like tuition, travel or healthcare — without tapping into Canadian funds. It’s also a chance to think about longer-term strategies like estate planning or debt consolidation and how your U.S. home can help you meet certain goals.
Two types of refinancing
Refinancing simply means replacing your existing mortgage with a new one. There are two main types of refinancing:
- Rate and Term Refinance — This option is used to secure a lower interest rate and/or change the length or terms of your existing mortgage.
- Cash-Out Refinance — As the name suggests, this type of refinance allows you to borrow a larger amount of money than you currently owe on your mortgage. You receive the difference as a lump sum of cash, which you can use however you like.
How cash-out refinancing works
Here’s a simplified example:
- Say your current mortgage balance is $300,000
- And your home’s current appraised 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.
- 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 might 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
Paperwork required
Since refinancing involves taking out a brand-new mortgage, you’ll go through an approval process similar to what you experienced when you first bought the home. That includes providing proof of income, employment history and financial 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.
The cost of refinancing
Refinancing comes with closing costs, which typically range from 2% to 5% of the mortgage amount. While that’s not insignificant, the value unlocked through equity — or the money saved through a lower rate — can often outweigh the upfront expense. It’s important to factor in these costs and run the numbers to ensure refinancing makes sense for your situation.
Bottom line
Refinancing your U.S. home can help you take advantage of a strong U.S. dollar, unlock equity and improve your cash flow. As with any major financial decision, it’s worth weighing the benefits, the process and the costs to make sure it’s the right move for you.
