Q & A With Darrin: Can I Refinance With Little Equity?

Darrin,
I can’t qualify for a conventional refinance loan because I have very little equity in my home – and no cash. Zippo. Zilch. Nada. When I first got my loan my credit was shot because of some stupid money decisions I made when I was “young and dumb”. My credit’s better now. I haven’t missed a payment in the two years I’ve had my mortgage and I’ve got only good stuff on my credit report now. Because of this I’m stuck – 12 % interest rate – and the payments are killing me. What can I do?

Hi there, thanks for your question.
Your situation is more common than you think. Canadians sign on the dotted line and accept a sky-high mortgage rate because it’s all they can get. The I Want It Now Syndrome kicks in, you take the loan, make your payments – improve your credit – and then can’t refinance because there’s not enough equity.

Do you have a retirement fund you can borrow from? While I don’t normally counsel people to take this drastic step, if you have a retirement fund you can borrow from, you might be able to pay your loan balance down to under 80% of your home’s value by temporarily borrowing from your retirement account and then refinance your mortgage to a much better rate. Then you could get a line of credit to repay your retirement fund. Let me give you an example:

Pretend for a moment your outstanding mortgage balance is $190,000 and your home is worth $210,000. In order to get your home down to under 80%, your loan balance would need to be less than $168,000. If you were able to borrow $25,000 from your retirement account, your balance would be less than 80% and – Voila! – you could then qualify for a rate as low as 5% or so. After you get that taken care of, there’s still the issue of the money you borrowed from your retirement fund. If you were to get a home equity line of credit you could then pay back your retirement fund and everybody’s happy.

However, before you take such a drastic step, you should discuss your plans with your tax and/or legal advisor because there could be significant tax implications to withdrawing money from your retirement fund. Keep in mind, too, that cash you borrow from your retirement fund can’t earn money for retirement while you’re using it for something else, so you’ll want to repay it right away.

Only you can decide if this is a step you want to take. Carefully weigh the tax implications against the long-term benefits of a reduced interest rate and much smaller monthly payments. It could very well be the right decision for you.

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