How to Effectively Use Your Home to Get Out of Debt

There is so much “get out of debt” advertising out there that it is hard to know which the right choice is when it comes to dealing with your debt. Here is a brief overview of the types of companies who offer solutions to get out of debt, what their solution is and the impact they can have on your credit. 

Banks generally offer lines of credit as a solution to individuals who want to get out of debt. The challenge with lines of credit is that they are essentially like taking out one big large credit card to pay off your debts. Because there is no fixed repayment to term we do not recommend lines of credit as a tool to get out of debt. A line of credit is an effective tool that can be used to consolidate debt but not a really good choice to get out of debt because, like credit cards, if you only make minimum payments you will never payoff your balance. Line of credit minimum payments are so low that it can be very tempting to get caught into a cycle of only making minimum payments. 

Bankruptcy trustees, credit counsellors and debt consultants offer programs to consumers who want to get out of debt but they carry huge implications. Any program that involves freezing interest to creditors, re-paying less than what you owe, settling debts for less than what you owe, a consumer proposal or bankruptcy will have long term consequences to your credit that last 3 years, 6 years or even longer. Many people are misinformed thinking that a consumer proposal, debt settlement or bankruptcy will give them a fresh start and that they will quickly recover from the bad credit because they did pay something to their creditors. This could not be further from the truth. When the time comes to rebuild credit after one of these programs, new creditors will see that you didn’t honour your full obligation to your past creditors and it will take significant re-established credit before creditors will trust you again. These companies often advertise debt consolidations but these aren’t really debt consolidations and so unless you have already totalled your credit, this is not really the best choice for getting out of debt. 

A loan that has a fixed repayment is the best way to get out of debt and preserve your credit at the same time. 

If you are a homeowner, leveraging your home equity is an excellent way to get out of debt. You do not have to refinance your first mortgage to obtain a loan against your home to get out of debt. You can obtain a second mortgage with its own term, amortization and payment that can be used to consolidate your debt. The reason that this is a good choice is because your creditors will be paid in full so your credit will not be damaged, second mortgage interest rates are less interest than unsecured loans and you will know when you will be out of debt. While your first mortgage may be amortized over 25 or 30 years, you can amortize your second mortgage over 5 years. This way you will know that after 5 years your debt will be paid off. For example; a $20,000 second mortgage at 12% interest amortized over 5 years bears a monthly payment of approx. $450 per/mo. 

With so many options out there for people who struggle with debt it is important to do research to ensure that the option that you choose is right for you! The right choice will consider your personal circumstances, income, credit, assets and future financial goals.