After 3 years of decline, the stock market appears to be at or near the bottom and ready to reverse direction. Over that same period homeowners have enjoyed watching the price of their homes increase, considerably. For those homeowners whose retirement portfolios have suffered in the last while or need to invest to build a retirement nest egg, now is the time to get smart about the opportunities available to them. Tapping in to the equity in your home is one such opportunity that may allow you to ride the "bull" market on its way up.

The EQUITY in your home is calculated as the difference between your home's appraised value, minus your remaining mortgage balance. For example, if your home is appraised at $250,000 and your remaining unpaid mortgage is $100,000, the result would be $150,000 of total equity. However, for borrowing purposes you can refinance only up to 90% of the value of the home. 90% of $250K is $225K, minus the mortgage of $100K allows you to access $125K for investing. The actual amount a homeowner can access will vary depending on your credit history, outstanding debts, income, and the like.

There are three different ways to access your equity; a new first mortgage, a line of credit or a second mortgage. Each product has its advantages and disadvantages.

New First Mortgage: This implies the replacing of the existing mortgage with a new one. If you're a qualified borrower, the rates will be extremely competitive and you will be able to refinance up to the full 90% of value threshold. The money is drawn down in a lump sum on one given day and the mortgage payable begins accumulating from that day onwards. In Canada, the interest payable on non-rrsp, investment loans is tax deductible. Therefore, the interest cost of the increased mortgage amount; the difference between the new mortgage and the existing mortgage, is tax deductible. The downside is this will be a high-ratio insured mortgage and an insurance premium will be incurred. Additionally, a discharge penalty may be payable to get out of the existing mortgage terms. There maybe some tax deductibility associated with these costs, so make sure you have a detailed paper trail for Canada Customs and Revenue Agency's (CCRA) benefit. I recommend you speak to your accountant regarding the taxation benefits.

Secured Line of Credit: A secured line is flexible and allows you access to your equity, only when you need it. Unlike a mortgage, you draw what you need and repayment terms apply only to what you have drawn down. If your financial plan calls for a staggered investment, this option would meets your needs best. However, a secured line of credit can only be placed up to 75% of the appraised value of the property. Referring to our example above, if you chose a secured line for your refinance, you will have access to only $87,500 (75% of $250K) and not the $125,000, as in the mortgage scenario. If you need the full 90% to accomplish your retirement income objective, this is not a viable option. The borrowing rate for a secured line is usually at prime which most often is below the fixed mortgage rates. Another advantage of a secured line is that you pay interest only on the amount you use, so you don't run up interest charges for unused portions, and using nothing costs you nothing. This makes for a lower monthly payment and the interest is tax-deductible as in the case of the mortgage loan.

Second Mortgages: Second mortgages-subordinate liens over a first mortgage-are most often used in refinancing when a 75% loan is not enough but 85 - 90% will do. By choosing this option you eliminate the pre-payment penalty for discharging a closed mortgage early and you eliminate the need for high-ratio insurance as in the case of a new first mortgage. However, since they create more risk for lenders, interest rates are higher than for secured lines or fixed-rate first mortgages, but over time they're less costly than refinancing the first mortgage.

General rule of thumb
The general rule of thumb for mortgage refinancing: if the mortgage interest rate is at least two percent lower than the original mortgage loan, then it is beneficial to refinance. However, if the objective is just to lower the monthly payment for the mortgage, then a smaller decrease in the mortgage interest rate can still benefit the borrower because it will lower the monthly payment amount due to a decreased rate.

Some reasons for mortgage refinancing
1. Lower monthly payment – with a lower interest rate, one pays less interest and if the time frame of the loan is extended, the monthly payment will decrease.
2. Debt Consolidation - believe it or not, many borrowers have multiple mortgages or various loans, a refinancing plan can consolidate the existing debt at a lower interest rate and can lower monthly payments.
3. Cash Flow Difficulty – refinancing/mortgage can provide available cash in as little as two weeks.

The Costs of Mortgage Refinancing
Mortgage refinancing also has additional costs. These include but are not limited to the application fee, an origination fee (paperwork for preparing/filing the loan – about 1% of the mortgage loan amount), title search, title insurance, etc. With all these additional costs, it would not be wise to refinance if you plan on moving in a couple of years because the mortgage interest rate savings have probably not accumulated enough to offset all the fees.

Consolidate other debt
Most unsecured debt is priced by your bank at a higher rate than your mortgage in order to compensate them for the higher risk of loss if you default. For many people it only makes sense to use available home equity to pay out this debt, as it typically reduces interest costs significantly. If the total of the existing mortgage and the debt to be refinanced is less than 75% of the value of your home, and you qualify in terms of income and credit standing, refinancing your first mortgage should be a breeze.

Renovations and home improvments
If you want to spend a significant amount of money on improving your home, you may be able to take out a lot more equity than you realized! A mortgage consultant can advise you through this process. Both insurers — GE Capital and CMHC, will insure new mortgages which are "topped up" for this purpose, and the total of your current mortgage and the new funds exceeds 75% of the current home value. Not all improvements are eligible, however. Pools and spas are typical "over-improvements" which may not qualify for a high-ratio equity take-out. Of course, if the total requirement is less than 75% of your home's current value, you should have little trouble getting the "top up" you need — regardless of the degree of luxury you plan to add.

Combining existing mortgages
Where the combined mortgages result in one "high ratio" mortgage:
If neither (or none) of the mortgages you're combining was ever insured, but combining them results in a high-ratio situation, you'll be required to pay an insurance premium. You need to look closely at the total savings the combination will give you, in order to determine whether this is financially worthwhile.

Where the combined mortgages result in a new "conventional" mortgage:
High ratio insurance is not required. As long as you qualify with your income and credit standing, a mortgage consultant will help you achieve this quickly and conveniently.

In both cases there is one critical consideration which causes the failure of many such refinances. The new mortgage often requires a fraction of the cash flow previously needed to service the now consolidated debt. Many who go through this process not only absorb the cash flow savings into an improved lifestyle — they either re-incur debt that they paid out, or incur debt for which they now qualify — or both. It is important to approach such a consolidation/re-combination of obligations with the clear and focused goal of applying all savings toward paying down the mortgage. Otherwise, the new mortgage will be a burden, rather than a solution.

Breaking a closed mortgage to transfer to a new lender
Many closed mortgages have the feature that allows the balance to be paid out with a penalty after a certain time has elapsed on the mortgage. Check the "prepayment" clause in your mortgage to determine your own situation, or better still, call your institution and ask them the cost of paying out in full.