Guest Post by Chris McCormick
INVESTORS or RENOVATORS ALERT:
Are You Looking to Access Some Equity in Your Home?
You may be able to do just that by using a mortgage option called, “Increase and Blend.” Essentially, your lender increases your mortgage, and blends the current interest rate with the new interest rate. This works well if you’ve paid down your mortgage or you’ve had an increase in the value of your home, thereby establishing equity.
Here’s an example:
Let’s say your home is currently worth $300,000, and you currently have a conventional first mortgage that you’ve paid down to $150,000. You would like to access some equity in your home to do some improvements or perhaps to invest. Providing you can financially qualify for it, Increase and Blend may work for you. Here’s how:
- Current Mortgage $150,000 at 5%, 5 years remaining on the term
- Plus the Increase Amount of $50,000
- Total New Mortgage $200,000
To figure out the blended rate, we need to establish the current 5 year mortgage rate, which in this case we’ll say is 4%.
$150,000 / $200,000 is 75%, so the existing mortgage will represent 75% of the new total mortgage amount of $200,000
$ 50,000 / $200,000 is 25%, so the new increase amount represents 25% of the new total mortgage amount of $200,000
75% x .05 = .0375 (where .05 is the existing 5% interest rate)
25% x .04 = .01 (where .04 is the 4% new interest rate)
Total of above = .0475 This will be the new blended rate.
The new blended rate for the total new mortgage of $200,000 will be 4.75%.
With the new mortgage of $200,000 and the current value of your home of $300,000, you are well within the parameters of a conventional mortgage at only 67% loan to value, leaving you a bit of a cushion of equity of $100,000.
Marg Scheben-Edey is a Broker with RE/MAX four seasons realty limited, Brokerage in beautiful Collingwood, ON. With three decades of experience, Marg is a leader in the local real estate marketplace and is ready to help guide both Buyers and Sellers in achieving their real estate goals. Email Marg