A mortgage is taken out for four major reasons. They utilise the funds to buy a home, refinance an existing mortgage, tap into equity, or bridge a financing gap.

 

Purchasing a Home

 

People use mortgages to help them buy homes along with a down payment.

 

Refinancing

 

Refinancing changes the terms of a mortgage, such as increasing the loan amount or lowering the interest rate. Until the mortgage is totally open, the lender may assess a penalty for prepaying the mortgage. The interest rate may be lower on the new mortgage. 

 

Equity take-out (ETO) 

 

An equity take-out occurs when a borrower takes out a second mortgage, line of credit, or increases their mortgage. Most ETOs consolidate credit card debt. At closing, the lawyer writes cheques to creditors to pay off other debts. Borrowers can also use equity to buy boats, cottages, or other assets as permitted by their lender.

 

Bridge Financing

 

When a person sells their current property and purchases a new home, bridge financing is used. In rare situations, a buyer may discover that the home being sold has a closing date after the closing date of the home they are purchasing. As a result, the homeowner is temporarily the owner of two residences. The issue here is that the down payment for the new property would generally come from the sale of the current home. The borrower will lose the new home and forfeit the deposit if the down payment is not made when the new home is scheduled to close. Bridge finance is just a second mortgage taken on the primary residence while it is being sold. This money will be used to make a down payment on a new property. The mortgage is repaid once the first residence is sold.

 

This acts as a "bridge" between the two residences.