How Can a Debt Consolidation Mortgage Help Me?

How Can a Debt Consolidation Mortgage Help Me?

How Can a Debt Consolidation Mortgage Help Me?

Having high interest debt can be extremely frustrating. You may wonder whether you’ll ever be able to pay it off and get out from the heavy burden. If you are a homeowner and have equity in your home, one possible solution to help you lower your interest rate and get out of debt faster is a debt consolidation mortgage. 

Debt consolidation mortgages take two main forms: refinancing and second mortgages. Both can help you pay off your debt more quickly, but the option that is right for you will depend on your circumstances.

Refinancing

Refinancing is when you break your existing mortgage and get a new mortgage that covers both the amount of your current mortgage and the amount of your debt. So for example, if your home is appraised for $500,000 and you owe $350,000 on your current mortgage and have $30,000 of debt, you would be able to break your current mortgage and be able to get a new one for $380,000. Thus allowing you roll your $30,000 worth of high interest debt into your mortgage refinance and have that debt paid off in full. This assumes of course, that you have sufficient equity in your home to borrow the additional $30,000 that you need. As refinancing will allow you to borrow up to a maximum of 80% of your homes appraised value. The main advantage of refinancing is that the interest rate will be lower than that of our next option (a second mortgage) however the disadvantage is that there will likely be a financial penalty for breaking your first mortgage which should also be considered.  

Second Mortgage

A second mortgage is a loan against the equity in your home. Most lenders will allow you to borrow up to 85% of your homes appraised value, and you can be approved based on the equity in your home rather than your income or credit qualifications. Since a second mortgage is a separate loan from your first mortgage, it does not require you to break your existing mortgage and therefore, there is no financial penalty as there is with refinancing. The drawback however is that you will pay higher interest on a second mortgage than you will if you refinance your first mortgage.

Which debt consolidation mortgage is right for me?

In order to determine whether it is better to refinance or to get a second mortgage, you will need to calculate the difference in interest rates vs. how much of a financial penalty you would have to pay if you refinanced. These calculations can get tricky, so working with a mortgage broker who is experienced in refinancing and second mortgage financing can help with running the numbers for you and it strongly advised. 

However generally speaking, the closer you are to your renewal date, the more it makes sense to refinance, and the further away your renewal date is, the more it makes sense to get a second mortgage.

If you feel like you are trapped under a mountain of debt, and would like to learn more about how a debt consolidation mortgage can help you, I invite you to contact me today for a consultation.


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