Debt Consolidation
Are you aware that you can combine all your high-interest debt, including auto loans, credit cards, and personal loans, into one low rate mortgage? By consolidating debt in a secured loan, against the equity in your property, you will have access to interest rates much lower than unsecured loans listed above.
Why Consolidate Debt?
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Lower monthly payments
Consolidating debts into your mortgage allows you to lower your monthly obligation by extending your payback period.
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Lower interest rate
Mortgage loans carry the lowest interest rates as they are backed by assets, and as a result are much less risky from the lenders perspective.
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Improves credit score
By lowering your monthly payments and consolidating multiple payments into one, you are more likely to make your payments in full and on time. This will improve your credit score, making you a more appealing candidate to lenders in the future.
Debt Consolidation Options
- Refinance: When a mortgage is refinanced, the borrower is required to break their current mortgage term before the maturity date and consolidate their mortgage and other debts into one single loan up to 80% of the home value. When a mortgage is broken early the borrower will likely incur a penalty. On a fixed rate mortgage, penalties are determined by an interest rate differential. In a variable mortgage the penalty is typical three months interest.
- Home Equity Line of Credit (HELOC): A HELOC is a line of credit which is leveraged against the borrower’s home. Lenders will lend up to 80% of the home’s value, minus the outstanding mortgage balances on the property. HELOC’s are all variable rate mortgages and come with slightly higher interest rates than a traditional 5-year variable mortgage rate.HELOCs give the borrower the flexibility to access only as much equity as they need at time. Interest is only paid on the amount used. For example, if the borrower has a HELOC amount of $200,000.00 but has only used $100,000.00, they are only paying interest on the $100,000.00. HELOCs do not require the borrower to pay down a mortgage of the loan each month. Rather, the minimum monthly payment is an interest-only payment based on the amount that has been withdrawn.
- Second Mortgage: A second mortgage is accompanied by higher interest rates. Second mortgages do allow access to more than 80% of the home’s value. A second mortgage may be the best option if the borrower cannot qualify for a larger loan amount with their existing lender. It may also make sense to do a short term second mortgage if the cost to break the existing mortgage is significant.