Can You Refinance Your Home to Consolidate Debt?

In Canada there have been many reports and massive media coverage about the amount of debt being carried by Canadian households. Many don’t realize when using credit cards and lines of credit to finance big ticket purchases that the interest is not only high in many cases but also compounds monthly. Monthly compound interest means that each month interest is applied to the balance. When you make minimum payments to a credit card product the end result is that a very small amount of your monthly payments ends up being applied to principal. 

Over time credit card debt can accumulate to the point where it becomes very difficult to pay off. Home owners in Canada have one very valuable asset that they can use to deal with their debt at very flexible and affordable terms. Using your home to consolidate debt is a great way to reduce the interest and payments that you are making to high interest credit card debt. 

It is important that if you plan to refinance your home to consolidate debt that you do it in a way that you don’t end up paying more in the long run. Refinancing your first mortgage is one way to consolidate debt at a low interest rate because generally speaking mortgages do offer the lowest interest rates available when compared to other credit products. The challenge is the amortization. When you refinance your home to consolidate debt you will reduce the overall mortgage rate but you will also stretch the debt out with your mortgage over 15, 20, 25 years or whatever the remaining amortization on your mortgage is. The best way to refinance your home to consolidate debt when refinancing a first mortgage is to reduce your overall amortization by a few years. Doing this will reduce the interest that you will pay on your first mortgage and because your first mortgage will generally represent a much larger sum than your debt, the savings will offset stretching out the repayment on the new debt you have consolidated. 

Another great tool when refinancing your home to consolidate debt is second mortgage financing and home equity lines of credit. Because a second mortgage or home equity line of credit has nothing to do with your first mortgage and will sit in second position on title you can obtain a low interest rate and then amortize this product like a traditional consolidation loan, over 5 years for example. This will see you reduce your monthly payments, reduce your overall interest, consolidate your debt into a single monthly payment and have a pre-fixed time period set where you will know that at the end of the term the debt will be paid. 

Any time you refinance your home to consolidate debt the mortgage process from the point of obtaining your mortgage approval to the point where your new mortgage is funded is about 2-3 weeks. At the end of the day refinancing your home to consolidate debt makes good financial sense.

For more information about refinancing your home to consolidate debt please call Paul Mangion at 416-204-0156 or visit www.themortgagecentretoronto.com