Understanding Home Refinancing
Many Canadians are facing high levels of personal debt. Whether it is from credit cards, vehicle purchases, loans, or more. Adding a mortgage onto all that debt can become an exhausting weight to carry!
If you are finding that your debt load is becoming too high, there are options available. One of the first steps to take is to speak with a financial advisor. They will be able to provide you with insight into what steps you can take, how long it will take to pay everything off, and how to create a budget or plan for debt repayment.
If you own your home, you have more options available than people who don’t. A big reason for that is that the longer you own your home, the more equity you are building. That equity can then be used to help you get back on your feet. As a homeowner, reach out to your local mortgage broker first. They will help you find ways to lessen your debt while still keeping your home.
One option you should consider is refinancing your mortgage and using your home equity to consolidate your debts. This is commonly referred to as mortgage refinance. You can achieve this in two ways, a mortgage or a standalone Home Equity Line of Credit (HELOC). Refinancing for a home equity line of credit means you can borrow 65% of your home’s appraised value, while a mortgage refinance allows you to borrow 80% of the appraised value.
Talking To A Mortgage Professional
Admitting that your debt has gotten out of hand can be overwhelming, with many people not knowing a refinance is available as a solution to help manage debt. Mortgage Associate Lori Grill says there is no need for embarrassment.
“I’m not giving you any more debt, we’re just going to make it easier for you to pay it back,” says Grill.
A professional mortgage broker will help you find ways to restructure your life and spending habits. Having one monthly payment to make is much more manageable than making multiple payments at higher rates.
Potential Risks To Understand
Debt consolidation has many benefits, such as buying you time and providing an emotional release from current debt pressures.
By consolidating the debt from other sources like personal loans or credit cards, you agree to pay it over a longer period of time. This means your debt repayment will take longer than it would have originally.
“You’re going to extend the life of this debt you have,” says Grill.
The length of time it takes to pay off your mortgage in full is called amortization. The amortization period is discussed with your mortgage broker at the time of approval. Your mortgage broker reviews the payments and makes a decision on what would be best for your cash flow. When you consolidate your debt into your mortgage, you are taking debt payments that could be paid off in a few years and including them in your amortization, which can be 20-30 years.
Ultimately, it will depend on your individual situation.
It wouldn’t be wise to use refinancing as a way to continue living a lifestyle that may not be sustainable. It is more like a Band-Aid solution that should be used as an opportunity to address your financial goals and reach a debt free lifestyle. By reorganizing your personal spending habits and paying off large amounts of debt you acquired, you would have otherwise struggled with, such as student loans or credit card.
Things to Consider Before Consolidating Debt:
If This Is The Right Fit For You
Before you rush out and refinance your mortgage, you need to determine if it is necessary to achieve your goals. Would it be possible to pay your debts by other means, such as savings? If you decide debt consolidation is right for you, considerations that need to be made include flexibility, fees, interest rates and terms and conditions. You should also determine what credit limit you will need.
Planning For The Future
You will need to decide how you’re going to use the money you’re borrowing and create realistic budgets for yourself. Creating and sticking to a repayment plan is key.
Mortgage interest rates will change as market interest fluctuates. According to the Bank of Canada, interest rates are low and expected to stay that way for a while. However, they will not always be this way. Considerations need to be made for how future interest rate increases may affect your plans. Thinking that you have done it once and can do it again if you need to is the wrong mindset to get into. Lenders may not be willing to assist a second time, so don’t count on it.
Something to consider beforehand is the costs that are involved with refinancing your mortgage for debt consolidation. These costs could include appraisal fees, a title search, title insurance, and legal fees. There may also be payout penalties on your existing mortgage. Often you can capitalize these costs into the mortgage, so it’s not an out-of-pocket expense.
With the recent state of the economy due to COVID-19, more homeowners are looking at refinancing their mortgage. If you need a mortgage broker in Calgary to assist you with refinancing or debt consolidation, reach out to our team at The Mortgage Group. Our brokers are always happy to help you find the best solution.