Advantages to Debt Consolidation
It is a fact of modern life that everyone carries debt. And sometimes, circumstances lead to that debt becoming overwhelming. However, many homeowners don’t realize that they have a solution, and they’re living in it. In your home is the means to combine all of your unsecured, high-interest debt into a single debt consolidation mortgage with a much lower interest rate and better terms.
There can be a number of advantages to such a mortgage, but the best one is the ability to pay down formerly high-interest debt over a longer period of time in one single loan payment, instead of making multiple payments that often don't even reduce the principle. For people with a lot of unsecured debt, like credit card debt, the ability to combine everything into one monthly payment that easily fits into your budget can be a major relief.
One reason such a mortgage is possible is because mortgages are backed by the collateral of your home, which means they carry less risk, as far as your lender is concerned. The lower the risk, the less interest you have to pay. And for you, in addition to only having to make one lower payment, consolidating multiple debts into one will significantly improve your credit score by eliminating many individual debts on paper, saving you even more money in the future by increasing your options.
There are a number of ways to use a mortgage to consolidate debt Canada.
You can refinance your mortgage, which requires you to technically break your mortgage and take another mortgage for up to 80% of your home's value, based on Canadian rules. That requirements is more conservative than it used to be; there was a time when lenders would allow a homeowner to borrow up to 110% of the available equity in their homes. Now, though, to prevent another economic meltdown, they require Canada homeowners to keep at least 15-20%, which means, if you don't have enough equity in your home, there can be no debt consolidation mortgage refinancing Canada. Again, since you are technically breaking your original mortgage, there is a penalty, as well. When refinancing, it is important to do so at the lowest possible rate, or there may be no point.
Another option is what is called a Home Equity Line of Credit, or HELOC, which is also usually maxed out at 80% of your home’s equity. In almost all cases, a HELOC is a variable-rate mortgage and carries a slightly higher rate. This is a line of credit, which means you are not simply advanced all of the money at once; you get to decide how much or how little you want to use as you need to use it. In other words, they work like credit accounts, but with much lower rates.
Another possible advantage to HELOCs is that they tend to only require interest-only payments for a time. There are fees associated with a HELOC, but if you add a HELOC to your first mortgage, you can avoid refinancing penalties.
A Debt Consolidation Mortgage is Not for Everyone:
While the idea of a debt consolidation mortgage is a great idea on paper, they are not right for everyone with a home. Economic experts are quick to remind homeowners that the purpose of debt consolidation is to reduce debt, which means you should only do it when you absolutely have to. It's recommended that people treat their home equity as a generally untouchable savings account and to only take out the money when they absolutely need it.
Also, once a homeowner gets a debt consolidation mortgage, they should commit to changing the habits that put them into such debt in the first place. That said, a debt consolidation mortgage has other benefits, as well. For example, credit card debt can make it more difficult to qualify for a debt consolidation mortgage because they may not meet the lender's debt-to-income ratio requirement, or DTI, which is a fancy way of saying their monthly debt may be considered too high compared with their income. On balance, for those with a lot of unsecured debt, like credit card debt, a debt consolidation mortgage can be a life saver.
The main reason for getting a debt consolidation mortgage is to reduce debt and save money, so getting the best mortgage rate and the best terms possible is very important. An experienced and knowledgeable mortgage broker Canada can make a huge difference and save you a lot of money. And because they know a lot about the market and your situation, they can help you deal with all of the potential problems and pitfalls to make everything easier and more financially beneficial for you. A debt consolidation mortgage Canada can make your life easier, but only if you get the one that fits your life.