We all constantly read that house prices in many places are quickly rising. This is a huge advantage when you are looking to do a refinance, or need a private loan. If the loan is not possible at this moment, it might be possible if you just wait a little while.
Many times people call me and ask “How much can I borrow?”. No doubt they are frustrated when I reply with, “That depends”, and proceed to ask them a bunch of questions. But it really does depend on several factors.
For private loans, the biggest factor is the value of the property vs how much you have already borrowed against the home. So if you have a house worth $500,000, and the existing mortgage is $250,000, you can usually borrow up to $175,000. HOWEVER, I will usually recommend keeping the borrowing to $125,000, or $150,000 if you REALLY need to.
In emergency situations, you might push it all the way to $175,000 in this scenario – but only in emergencies. Otherwise, going all the way to this level of borrowing on a $500,000 house is too expensive. If you are in Power of Sale, have a wage garnishment from CRA, something like this – then you might go to 85%. Otherwise, it is best to limit yourself so the costs don’t get too high.
Obviously the numbers listed above are based on a $500,000 house, and a $250,000 mortgage. You would want to contact me, so we can discuss your situation (with a home of a different value, and a mortgage of a different balance, etc …)
But let’s say that you have credit card debts of $180,000 – so your $500,000 home will not provide sufficient security with a $250,000 existing mortgage?
Luckily, around the Toronto area at least, we have house prices quickly going up! So if 6 months ago your house was worth $500,000 – today it might be worth $525,000 or $550,000. Obviously with your mortgage balance about the same – you can now borrow more, as you have more available equity to act as security!
In some areas of the GTA, prices are reportedly rising around 20%-21% per year. So even if you were unable to get yourself out of credit card debt a year ago, we should look at the situation again. It is quite likely that the finance situation now looks entirely different, and the loan can now proceed.
We also often use rising house prices to our advantage when we refinance out of private loans, on their one-year and two-year anniversaries. As you can read from an earlier post in this blog, you would normally refinance a year or two after entering into a private mortgage – to lower your costs, and consolidate everything into one payment.
When refinancing with a bank or subprime lender, they will usually require a maximum 80% loan to value on the combined total of both the first mortgage, and the second private mortgage. Although the private mortgage might have been done at a level of 85% loan to value (due to Power of Sale, Judgement, Garnishment – some emergency), a year later the value of the home may have risen sufficiently that we can refinance with a subprime or bank lender at an acceptable loan to value – simply because the house has gone up in value!
We can also use rising house prices to get you lower rates on existing subprime – and even bank mortgages. Because the house is now worth more, the balance on the mortgage is a lower percentage of the home’s value. The lower loan to home value can lower the risk of the mortgage to a bank or subprime lender, so you now qualify for a lower rate.
When discussing a home’s “Value” – it is important to make a distinction between a Listing Value – and what it will sell for. Often people call me and say “So and So’s house just sold for $1.5million dollars, and mine has crown moulding, so therefore mine is worth $1.75million.”
It may be true that your house is worth “1.75million” – we would need to ascertain a value. But how values are determined on the basis of COMPARABLE SALES, of COMPARABLE PROPERTIES, in YOUR area.
Note these three criteria – the house had to SELL for that (not just be listed for sale – and then there were no buyers); AND the house had to be a comparable house (similar in size, similar in condition, similarly designed); AND the house has to be in the area (it can’t be miles and miles away).
The value of the house is therefore based on SALES data, from the recent past (usually a few months), on the immediate street or nearby streets. From this data, the appraiser will reach an (expert) conclusion as to what your house would sell for, if listed on MLS, for a period of 60-90 days.
So I hope that if you were unable to refinance a number of months ago, you will touch base with me now. You might be able to refinance immediately.