If you’re feeling overwhelmed by your monthly financial obligations, you may want to consider using the equity you’ve built up in your home to consolidate debt and take advantage of today’s historically-low interest rates, which allows you to save money and improve your cash flow.
With consolidated payments, you can efficiently eliminate debt as well as the stress and burden that comes along with stretching your finances to the max each month. There are a number of options available, however, so it’s important to consider which would work best for you.
One of the most common ways to consolidate debt using your mortgage is through a refinance. This involves breaking your current mortgage agreement and rolling your outstanding debt into a new one, resulting in one easy payment. Your outstanding mortgage balance will be higher, but you’ll have peace of mind knowing that your debts are repaid and your high-interest debt isn’t continuing to grow. Typically, your lender will arrange to pay your creditors on your behalf. There may be a financial penalty for breaking your existing mortgage early, however, but it could still be advantageous to do so in order to pay off your higher interest debt right away. I’d be happy to help you weigh your options based on the penalty you’d face to break your mortgage mid-term vs how much the ongoing high-interest debt burden will cost you until your mortgage term comes up for renewal.
Home equity line of credit (HELOC)
A HELOC is a line of credit that uses your home’s equity as security that you can draw from for debt repayment. Unlike a loan, you don’t receive all of the funds at one time but, instead, you can access as much as you need and only pay interest on the amount withdrawn. As you make payments, the credit revolves and becomes available for you to use again. And because the credit is secured by your home, the interest rate is lower than what you would pay on an unsecured loan. Since you’re only required to make interest payments on the money borrowed, however, it’s important to have a repayment plan in place so you’re not constantly paying interest.
Home equity loan
Similar to other types of loans, a home equity loan provides you with a one-time lump sum based on your available equity, which you can then use to repay your debts. Depending on your available equity, the amount you can borrow could potentially be much higher than with a personal loan. Similar to a HELOC, your home is used as collateral and, therefore, the loan itself carries less risk and lower interest than other loans. You’ll have a structured repayment plan over a set period of time and, with each payment made, you’ll reduce the balance as well as the interest, which is usually at a fixed rate.
A reverse mortgage allows Canadian homeowners aged 55 and older to borrow against the equity in your home. This type of financing doesn’t require you to make regular monthly payments like you would with a traditional loan, which frees up money to then be used towards debt repayment. A reverse mortgage is only paid back when you sell or leave the house and, although interest rates tend to be a bit higher than with a traditional loan, they’re offset by the fact that repayment isn’t required until the loan comes due.
Once you’ve taken advantage of a debt consolidation strategy as a fresh financial start, it’s important not to fall back into the habit of overextending your finances or racking up credit cards simply because they’ve been paid off. This is your chance to wipe the slate clean and work towards financial freedom so you’ll be well prepared for what lies ahead.
Have questions about consolidating your debt? Answers are a call or email away.