Can You Refinance Your Mortgage to Consolidate Debt?
Combining a variety of debts into one debt, called debt consolidation, can be a powerful way for you to get your financial situation under control. There are many ways to do this, but one of the most common is to refinance a mortgage.
This is also referred to as getting a second mortgage or taking out a home equity loan. Here’s what you should know about doing this, including the pros and cons.
Understanding Debt Consolidation
Consolidating your debts requires you to take out one large loan to pay off two or more smaller loans. The idea is that you’ll save money on the payments for your consolidated loan because you’ll pay less interest, thereby making it easier to keep up with your payments since there’s only have the one to keep track of.
How Refinancing Your Mortgage Works
Broadly speaking, there are two ways you can consolidate debts through your mortgage: refinance or get a home equity loan.
Refinancing involves replacing your existing mortgage with a new one. This new mortgage will usually have different terms and interest rates.
Another option is to take out a home equity loan, which means borrowing money against the portion of your home that you own. For instance, if your home is valued at $500,000 and you already have a mortgage for $400,000, then you have $100,000 in home equity, and you may be able to use some of it to pay back debts.
- The Pros
Since your consolidated debt is now secured by your home, chances are you’ll have access to much lower interest rates than before, especially if you’re paying off high-interest credit card debt. If possible, try to negotiate a fixed interest rate. Another advantage to this is that you can review your payment schedule and make it fit better with your current financial situation.
- The Cons
The biggest downside of refinancing your mortgage to consolidate debt is that if you can’t make your payments, you run the risk of the bank taking possession of your home. This is because your debt is now backed by the property. Though you can benefit from the lower interest rates, you should keep in mind that consolidating debt this way can have serious implications if you can’t keep up with your payments.
Speak with Experienced Debt Consolidation Experts in Ottawa Today!
While refinancing can be a great option, it’s important to speak with an expert before taking the plunge. The licensed insolvency trustees at D. & A. MacLeod Company Ltd. are here to help you understand your options and pick the best one for your unique situation. Our mission is to help you find your way to financial independence, so contact us today for a free consultation in Ottawa or at one of our offices across Eastern Ontario.