Credit cards, unsecured lines of credit, car loans, personal loans and other monthly obligations can quietly consume thousands of dollars every month. A homeowner can have substantial equity in their property and still feel like there is almost nothing left after the bills are paid.
If that sounds familiar, using home equity to consolidate high-interest debt may be worth reviewing.
Lendworth helps Ontario homeowners assess whether a debt consolidation mortgage, second mortgage or mortgage refinance could be used to restructure multiple debts into a more manageable financing plan.
Consider a Toronto homeowner with a property worth approximately $1.25 million and a $520,000 first mortgage.
The homeowner also carries $28,000 on credit cards, a $22,000 unsecured line of credit and a $15,000 personal loan.
That is $65,000 of additional debt spread across several lenders, each with its own payment and interest rate.
Even if every payment is being made on time, the monthly cash flow can become extremely tight.
Meanwhile, the property may contain hundreds of thousands of dollars in equity.
That creates an important question: should some of that equity be used to eliminate the expensive unsecured debt?
For some homeowners, the answer may involve refinancing the existing mortgage and incorporating the other debts into the new financing.
A mortgage refinance can potentially combine the existing mortgage and selected debts into one structure. Whether that makes financial sense depends on the current mortgage rate, available equity, penalty, total borrowing costs and how long the homeowner expects to keep the new financing.
But refinancing the entire first mortgage is not always the best approach.
If the homeowner already has an attractive first-mortgage rate or would face a significant prepayment penalty, a second mortgage may provide another option.
Instead of replacing the first mortgage, a separate second mortgage may be used to pay off higher-interest credit cards, lines of credit or other obligations while leaving the existing first mortgage in place.
The goal is not simply to move debt from one place to another.
The goal is to improve the overall debt structure.
A homeowner who is making five or six separate payments each month may be able to replace some of those obligations with a more organized secured financing arrangement. That can potentially reduce monthly pressure and make household cash flow easier to manage.
The right solution depends heavily on the numbers.
For example, consolidating $70,000 of consumer debt into home-secured financing can reduce the immediate monthly burden, but the debt is now secured against the property. Interest rates, lender fees, legal costs and repayment timelines all need to be considered carefully.
For borrowers who do not qualify at the bank because of income, credit or debt-service ratios, a private mortgage in Ontario may also be available.
Private lenders can place greater emphasis on the property's value, existing mortgage balance, available equity and repayment strategy rather than relying entirely on conventional bank qualification.
This can be particularly relevant for self-employed homeowners, borrowers whose credit has weakened or people who already carry enough debt that the bank will not approve additional financing.
If monthly payments are becoming difficult to maintain, it is usually better to review the situation before accounts begin falling behind.
Once missed payments, collections or mortgage arrears begin appearing, the financing problem can become more urgent and potentially more expensive.
A homeowner who still has substantial equity may have more options before that happens.
Debt consolidation should also be accompanied by a plan to avoid rebuilding the same unsecured balances after they are paid off. Accessing home equity can solve the immediate financing problem, but long-term success depends on keeping the underlying debt under control.
If high-interest credit cards and loans are consuming too much of your monthly income, your home equity may provide another way to restructure the debt.
Lendworth can review your property value, mortgage balance, current debts, monthly payments and available equity to determine whether refinancing, a second mortgage or another home-equity solution may be appropriate.
Learn more about Debt Consolidation Mortgages, Second Mortgages, Mortgage Refinancing or request your mortgage options.
Lendworth Financial Corp. — FSRA Mortgage Brokerage #13494
905-597-1225 | Lendworth.ca
Your Equity Deserves More™.