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Why You Shouldn’t Use Your Mortgage to Consolidate Your Debt

couple deciding how to consolidate their debt

You’re facing a lot of debt, and you’ve been researching different ways to eliminate that debt. During your research, you’ve probably read a lot about using your home equity to help consolidate your debts. Many people will tell you about the benefits of tapping into your home equity to consolidate your other high-interest debts. Unfortunately, those people don’t talk about the risks and downfalls of using your home equity to consolidate your debt.

While there are great benefits to using home equity to consolidate your debt, there can be some major long-term repercussions.

These are the risks and downfalls to think about before you choose to consolidate your debt with your home equity.

It will take you longer to pay off your debt.

One of the main reasons why people use a HELOC (Home Equity Line of Credit) to consolidate their debt is because it usually has a very low-interest rate. Especially in comparison to high-interest debt, like credit card bills, using a HELOC means paying less in interest. But are you really paying less in the long run?

When you choose a HELOC, you may opt for a lower interest rate; however, your repayment terms will increase. When you extend your terms from a few years to as many as 30 years, the overall cost of your debt can actually increase, even if you have a lower interest rate. You may be paying less monthly, but long term, you’re paying more for your debts over a longer period of time.

Another important factor to remember is that HELOC interest rates are variable. So, you could be refinancing for a lower rate now, but that rate can increase. If the rate increases, you may, again, be paying more in the long run.

Before opting to use a HELOC to consolidate your debt, it is extremely important to do the math. Find out how much you will be paying in the long run and whether it is worth it or not.

You may rack up even more debt.

Let’s say you decide to tap into your home equity to pay off your credit card debt. Your monthly payments are now lower, and you’ve freed up space on all your credit cards.

Here is where the trouble sets in for many consumers.

When people see that they have repaid their credit card debt, they can end up using credit cards again for unexpected or emergency expenses and are often tempted to spend again. They begin rebuilding that debt, and they will now have even more trouble repaying it. Remember, when you consolidate your debt using home equity, your debt is not gone. Your debt, which is now secured against your home, still needs to be repaid, so be mindful of your spending and take on more debt.

As a homeowner, you are able to access your home equity whenever you need it (depending on the terms of your mortgage agreement, of course). People begin seeing their home as a resource where they can use their equity whenever they need or want it. We’ve seen it before where people start treating their equity like their own personal ATM. But equity is not an unlimited resource. It’s not something you should access for a fancy vacation or a new car. If you use up your equity, you may not have any left when you need it the most. It’s better to leave your home equity alone and only access it if you truly need it.

You could be violating the terms of your loan agreement

Personal loans are usually meant for consumer debt. Certain types of debt cannot be paid off using another type of loan or home equity. For example, if you’re using a HELOC to pay off your student loan debt, you could be violating the terms of your loan agreement.

Your lender may not notice what you’ve done, but it can be a major problem for you if you’re caught violating the terms of your loan agreement. You could face significant fines, or you may need to repay the money you used right away. This could mean coming up with thousands of dollars in a short time frame to repay your lender and avoid any more fines.

You risk losing your home.

Consolidating your debt is a good thing, but only when it’s done right for the right reasons. When things go wrong, you can find yourself in a very serious and dangerous financial situation. Paying off high-interest debt with low-interest debt seems smart, but that’s only the tip of the iceberg.

Diving deeper, you’re transferring unsecured debt into debt that uses your home as collateral. If you are unable to make payments, you risk losing your home. Yes, while there are risks when you don’t make your credit card payments on time, the consequences aren’t as severe as losing your home.

The bottom line

You should only borrow money for purchases that will improve your financial situation in the long run. Don’t put yourself in a situation where you put yourself more at financial risk because of your debt. At GetMeDebtFree, we have searched out who we believe to be the best companies to help Canadians deal with their debt. How would we know who is best suited? Because of our years of industry experience and working with thousands of clients. If the company does not pass our gold standard test, then we will not recommend their services. If you are looking for the best advice on how to consolidate your debt, fill out our contact form, and we will be sure to refer you to a company that we approve of. Let it be clear, we do not take funding from banks, we do not mine your data, nor do sell your information to all kinds of companies. We are simply looking to connect people who are serious about dealing with their debt to a professional who is best suited to help make that happen. You have nothing to lose and much to gain, so fill out a contact form and take that first step to a debt-free future.

couple deciding how to consolidate their debt

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