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Getting Ready to Refinance

When deciding whether to refinance, the first step is to establish what your goals are. Some of the most common reasons to refinance your current mortgage are to take cash out, get a lower payment, or change your loan term.

Equity Take Out

Refinancing your current mortgage is an excellent way to access the equity you have in your home. A cash-out refinance allows you to refinance your existing loan for an amount higher than what you owe now, and use the difference as you see fit.

Many homeowners use the cash they receive to consolidate other high-interest debts, such as credit cards and personal loans. The additional equity can also be used to finance larger projects such as home renovations, start or expand a business or education expenses. With mortgage interest rates regularly being lower than rates associated with other types of debt, taking equity out of your home can be a great solution for paying off debt.

Many homeowners use the cash they receive to consolidate other high-interest debts, such as credit cards and personal loans. The additional equity can also be used to finance larger projects such as home renovations, start or expand a business or education expenses. With mortgage interest rates regularly being lower than rates associated with other types of debt, taking equity out of your home can be a great solution for paying off debt.

You may be able to access the equity in your home if the property value of your home has increased; a higher value on your home will allow your lender to finance a higher loan amount. You may also be able to access additional funds if you have paid your current mortgage long enough to have built up equity.

Lower Payment

Lowering your current mortgage payment can create flexibility in your budget. Here are a few ways that you can achieve a lower payment with a refinance.

The most common way to lower your loan payment is with a lower interest rate. If the interest rates offered now are lower than when you bought your home, it's worth talking to a Sunlite mortgage professional to see how much lower your new rate could be. By getting a lower interest rate not only does that mean lowering the interest portion of your payment, but also big savings over the life of your loan.

Another way to lower your current loan payment is by changing the term of your mortgage. By stretching your loan repayment out over additional years, you can also lower your monthly mortgage payment (though you may end up paying more interest over the life of the loan).

You can also refinance in order to get rid of your Mortgage Default Insurance - a fee you pay monthly to protect the lender in case you default on your loan. Mortgage Default Insurance is required when you have a high ratio mortgage or your down payment is less than 20%. By refinancing to remove the Mortgage Default Insurance you can save money monthly and avoid a fee that's no longer necessary.

There may be additional ways to lower your monthly mortgage payment as well, so it's always worth checking with a Sunlite mortgage professional to ensure you are in the best financial position possible.

Shorten Your Mortgage Term

When shortening your mortgage term, often more favorable interest rates will accompany shorter term loans, typically 15 year terms or less. This lower interest rate coupled with fewer years on the term of the repayment mean big interest savings over the life of your mortgage.

The principal balance amortizes or reduces more rapidly with a shorter term due to the shorter amortization schedule and less of your monthly payment going to mortgage interest. This allows you to establish equity in your home faster and pay it off sooner. It is important to note that shortening your term may cause your current payment to increase.

How does this all work? For example, if your current mortgage balance is $450,000, amortized over 30 years at a rate of at 2.89%, over the life of the loan you would pay about $220,000 in interest. However if you cut that mortgage term down to 20 years, the amount of interest paid drops down to $142,000. Simply by reducing the term you would save $78,000 over the life of the mortgage loan in this example.

Things You Need To Evaluate Before Refinancing

Once you know what you would like to accomplish by refinancing, there are a few factors to consider: your credit score, the value of your home, your current budget, and your total debt service ratio (TDS).

Your Credit Score

Having a good knowledge of your credit score and overall health of your credit will help you better understand what options are available to with a refinance. There are countless online resources to help you find out your credit score and review a copy of your credit report for free.

The Value of your Home

If you are considering taking equity out of your home or just reducing the interest rate or loan term, it is important to have a good estimate of what your home is worth. Lenders cannot lend more than a certain percentage of your home's value (often 80%) so an appraisal of the home's value that comes back lower than expected can impact your ability to refinance and on what terms.

Your Current Mortgage Payment

Knowing how your current mortgage payment fits into your overall monthly budget is crucial in evaluating your refinance options. Whether you are just refinancing for a lower payment or taking equity out of your home in order to consolidate other debts, it is important to know how much you currently pay and how much you would like to save. If you are considering a shorter term for your mortgage, it is important to know how much you can increase your payment while still being comfortable within your budget.

Your Debt Service Ratios

Another key factor to consider is your Debt Service Ratios. Using our Mortgage Affordability Calculator, you can calculate how much you could borrow to purchase your new home. Your Gross Debt Ratio is the percentage of your income allowed for your mortgage principal/interest, heat, taxes and 50% condo fees (if applicable). Your Total Debt Service is your GDS plus all other debt divided by your monthly income. This is how most lenders and creditors measure your ability to repay your debts. Lenders consider a GDS of 35% and a TDS of 42% although you could still qualify at higher GDS/TDS at higher rates with alternative lenders.

For example: if you currently pay $1,500 per month for your mortgage and another $500 for taxes, your monthly mortgage debt would total $2,000. If your gross income was $6,000, then your gross debt service would be in the acceptable range at 33%. If you pay another $500.00 a month for credit cards, auto loans, student loan etc., your total debt would now be $2,500 and your total debt service would be 41%.

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