If you have equity in your home, there are several mortgage solutions that can help you consolidate your debt. One of the most common of these is refinancing.
What is refinancing?
Refinancing is breaking your current mortgage and signing on to a new one. With the new mortgage, you roll your higher interest credit card and other debt into the total. The amount you pay on your mortgage might be a little more, but you eliminate your other debt payments, so in total you could be paying hundreds less every month.
Refinancing may also help to lower your total interest payments, so you pay more of the principal each month which enables you to pay off your debt faster.
What about penalties?
If you’ve ever wanted to break a mortgage early, you know that, that can come with penalties. In many cases however, refinancing to consolidate debt results in such significant savings that any penalties you incur from breaking your mortgage are negligible.
To know whether refinancing would be worth it for you, your mortgage broker will take into account several factors including interest rates, your mortgage renewal date etc. As I mentioned earlier, refinancing is one of several mortgage solutions for consolidating debt. Your mortgage broker can help you determine if it is the right choice for you.
But wait, I’ve heard refinancing is a bad idea…
Some people argue that you shouldn’t refinance because you are likely to go right back into credit card debt, and then you will have a higher mortgage payment to boot. But that argument is like saying you shouldn’t go on a diet to lose weight because most people gain the weight back.
The truth is, that if you are not committed to getting and staying out of debt, then you could end up in a worse financial position. Just like staying physically healthy takes discipline, so does staying financially healthy. In addition to making your regular mortgage payments, it is a smart idea to start a savings plan and build up an emergency fund so you won’t have to turn to your credit cards for an unexpected car repair or medical bill. Traditional wisdom suggests you save until you have at least three to six months living expenses accumulated.
When you are ready to make that commitment, then refinancing your mortgage to consolidate your debt can give you the running start you need to get out of debt for good.
If you would like to learn more about refinancing and determine if it is the right strategy for you, I welcome you to give me a call to discuss it.