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Refinancing your mortgage – it sounds scary at first! But having the option to refinance can actually be a good thing. In fact, refinancing your mortgage can be a great financial tool – one that helps you accomplish financial goals at a low interest rate.
Let’s take a look at three examples where refinancing is the right option, with our test subject Sally and her $350,000 home.
1. Taking Advantage of Low Interest Rates
Refinancing to take advantage of low interest rates might be a great way to save money, but it’s extremely important to be aware of the prepayment penalty you’ll have to pay upfront to get that rate. For example, Sally has a $225,000 mortgage on a home that is valued at $350,000. She’s 3 years into a 5-year fixed rate term at 5.00%. Sally is considering refinancing another 5-year term at a lower interest rate of 3.50%.
At first glance, this seems like a great idea! Saving 1.50% on a $225,000 mortgage means Sally would save $6,750 in interest (1.50% x $225,000 x 2 years). However, by using this mortgage refinance calculator and factoring in her prepayment penalty of $2,813, we can see that Sally would only save $3,937 after she pays the penalty to break her mortgage term early. Refinancing will still save Sally money, ask me how you can make this work for your situation.
2. Accessing Equity in Your Home
Refinancing your mortgage can allow you to access up to 80% of your home’s value (sometimes more). By refinancing, you can access your equity and use those funds to renovate your home, send a child to post-secondary or buy a second property, without having to sell your home or take on a second loan at a higher interest rate.
For example, if Sally wanted to access the equity in her home to renovate her kitchen, she could access 80% of the value of her home, minus the value of her outstanding mortgage, for a total of $55,000 ($350,000 x 80% – $225,000). Her new mortgage would be $280,000 ($225,000 + $55,000), and her payments would decrease from $1,745 to $1,398 due to the new term and lower interest rate. She’d still have to pay a refinancing penalty fee of $2,813, which would cut into that $55,000, but she’d have access to that equity at a much lower interest rate than if she’d taken out a traditional loan. This is a great way to do the things you want, without having to dip into your savings account.
3. Consolidating Debt
Finally, one of the most popular reasons to refinance a mortgage is to consolidate debt. Mortgages are one of the least costly forms of debt available, with lower interest rates than a credit card or even a personal line of credit.
For example, if Sally wanted to pay off $20,000 of credit card debt that had an interest rate of 19.00%, she could refinance and use the equity in her home to do so, shifting her high interest consumer debt over to her much lower interest mortgage debt. Don’t forget that Sally would still have to pay a prepayment penalty of $2,813. Her total mortgage amount would also increase to $245,000 ($225,000 + $20,000), but she would save thousands in credit card interest charges. Ask me how you can do this today!
Costs of Refinancing Your Mortgage
Before you refinance your mortgage, it’s important to calculate the closing costs involved to see if it’s the right choice for you. For starters, you’ll have to pay a prepayment penalty. If you have a fixed rate mortgage, it’s the greater of three months’ interest or the interest rate differential (IRD). If you have a variable rate mortgage, the penalty is just three months’ interest. Either fee could outweigh the savings you would get through a refinance, so it’s important to talk with me before you go through with the refinance.
You may also have to pay a real estate lawyer to conduct another title search, as well as review all documents, register the new mortgage and facilitate the financial transaction. Many lenders and brokers will cover this legal expense for you.
KV Mortgages - 2014
A home renovation can be a daunting task, considering the cost and time involved, but it can also be immensely rewarding and increase the value of your house. The kitchen is one of the most-used areas of your home, and critical to keep updated, for your own enjoyment as well as resale value.
When undertaking a kitchen renovation, there several things to do to ensure success:
Do your research: The real estate market fluctuates often, so check out the market trends in your area. To get a great return on your investment you need a current design plan. Look into various materials and appliances, then decide if it's going to be a DIY project or if you are hiring a contractor.
Decide on a budget: The cost of a kitchen renovation can easily soar if not kept in check. After doing your research, come up with a reasonable estimate of the cost: necessities first, then adding in the extras. Don't forget to account for labor costs if you're not doing the work yourself. After the intial budget is set, it's a safe bet to add on 15 to 20 per cent for miscellaneous costs.
Use quality cabinet materials: It's normal for replacement cabinets to take up a large percentage of your budget, but don't skimp on quality. If your current cabinets and drawers are solid and in good repair you might consider refinishing them, but to get a fresh, consistent look a complete replacement is the way to go. Add good quality hinges and drawer slides that will keep cupboards closed and drawers from sticking. While style and colour are personal choices, when considering resale value it's important to have uniformity and choose complementary styles that fit in with adjacent rooms.
Choose an elegant countertop: Choose a timeless, elegant countertop. Granite is a popular choice. It's available in a variety of shades and each piece is unique. Other stone materials to consider are marble, limestone or soapstone, as they all have a classic appeal. Concrete, stained wood or stainless steel have become trendy alternatives with a modern edge. The choice you make should complement your choice in backsplash. It's not necessary to have them match completely, but they should at least coordinate.
Purchase energy-efficient appliances: A modern kitchen isn't complete without energy-efficient appliances. Look for the Energy Star label to be assured you're purchasing a "green" product. As for colour choice, stainless steel is still leading the pack and the most popular appliances combine form and function. Consider a high-wattage microwave, a gas range and a refrigerator with a built-in water filtration system and ice maker.
Lay new flooring:The kitchen is the work-horse of your house and the floor needs to be able to handle the stress. Popular choices when updating your kitchen are tile or hardwood. There are many size, colour, texture and design options with tile and it's a durable and beautiful option. Hardwood is easier on the legs, has many stain choices and is durable, but has a tendency to get scratched or damaged in the kitchen. Hardwood in your kitchen will generally blend in with the rest of your home.
Add an island:The kitchen is the heart of the home and a great way to help add to its value is by adding an island. Not only does it give you more work space, it also allows family or guests to sit nearby while you work.
There are other cosmetic changes you can make when renovating your kitchen, such as fixtures and lighting, but they can be readily replaced and generally don't add much more than aesthetic value to your home.
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