When it comes to debt, we all want the easiest and fastest solution to pay it off. Despite what many other ‘debt insolvency’ companies will tell you; bankruptcy is often a high-risk way to consolidate your debt. There are many different options when resolving your debt, but choosing which option suits your needs best all depends on the specific situation. Everyone’s experience with debt is different so in our world, there is no such thing as a ‘one size fits all’ solution.
One way you can pay off your debts is by refinancing your mortgage. Refinancing means renegotiating your current mortgage agreement. But why would you want to do this to pay off your debts? Below we will explain how refinancing your mortgage can help you relieve your debt issues. We will also review certain risks to look out for if you decide to use this method to resolve your debt.
Why do people refinance their mortgages?
There are many reasons a person may want to refinance their mortgage. Typically, people will choose to refinance their mortgage to renegotiate a lower interest rate or shorten the term. Others may need to tap into their home equity for extra cash. This could be anything from money needed to pay off a financial emergency, a home renovation project, or to consolidate debt.
But people don’t just access their home equity without justifying a good reason to do so. For example, if you wanted to take out money for a home renovation project, you could argue that doing so would increase the value of your home. The same goes with using it for debt consolidation. People don’t opt to use home equity towards paying off other debts unless it will save them more money in the long run.
Is it a good idea to use your home equity to pay off your other debts?
Before you decide to use your home equity to pay off other debts you have, you’ll need to do a bit of research and evaluate the pros and cons. First, you’ll need to find out how much equity you have in your house. Home equity is the value of a homeowner’s interest in their home or the amount of money they have paid down on the principal value. If you don’t have a lot of equity in your home, then it’s not worth the hassle of refinancing your mortgage. If you do have enough equity built up, you can move on to the next step.
Once you’ve declared how much home equity you have and whether or not it will cover your debts, you’ll need to evaluate and compare interest rates. For example, let’s say you have a high amount of debt on various credit cards. Credit debt usually has a very high-interest rate. If paying back your mortgage loan has a much lower interest rate, you can potentially save a lot of money on interest by doing so.
Using your home equity could end up being less expensive than it would be for you to take out a regular loan as well. But be sure to consider all costs involved with refinancing your mortgage. There are usually fees involved which again, if not carefully considered, could end up costing you more. A prime example of an extra fee might be a penalty fee for breaking your current mortgage. In order to refinance your mortgage, you essentially have to break one contract and make a new one. Many mortgages make you pay a penalty fee for this contract change even if you are keeping the mortgage with the same lender. Be sure to read the fine print before you break your contract to make sure the dollars and cents add up in your favour. If you owe $10,000 but also have to pay a $10,000 penalty fee to break your mortgage, refinancing might not be the best debt solution for you to use.
Understand the risks involved with refinancing for debt consolidation purposes
Could you potentially save yourself money by using your home equity to pay off your other high-interest debts? Absolutely. But there are risks involved with doing this. One key thing to think about is that your debt isn’t disappearing, it’s just redirected. You will still have payments to make, and you are still responsible for making those payments on time.
Also, consider how this will affect your mortgage. Increasing the number of years that you owe on your mortgage is rarely a smart financial decision unless you can argue that it is. Does it make sense to replace high-interest debt with low-interest debt over a longer period of time? 100% it does. But here’s the big issue – this is a temporary solution. If you can resist spending and piling your debt back on, then it’s a great solution, but if not, you could be putting yourself in an endless debt cycle.
Be sure to contemplate what’s at stake here as well. Let’s say again that you’re looking to relieve high-interest credit card debt. If you don’t make your credit payments on time, a lender can’t take your house as collateral. If you miss your mortgage debt payments, they can. So again, carefully evaluate all the pros and cons before you make any big financial decisions.
Consider all your options with us at 4 Pillars At 4 Pillars, it’s our mission every day to help people with debt find the best solutions for their financial situation. We can help you decide if refinancing your mortgage is your best option for resolving your debt. If it’s not, we can lay out all your options and give you the best chance at debt freedom. We’re not here for temporary solutions. We’re here to get you out of debt and to help you stay out of debt. We can create a plan for you to complete which will make it easier for you to pay your debts and potentially save you money in the process. Before you make any major decision, give us a call at one of our three locations to book a free consultation! Asking an expert won’t cost you a dime. You can reach our Muskoka & Parry Sound office at 705-640-0187, our North Bay office at 705-980-0158, or our Sudbury office at 705-806-1252. At 4 Pillars, we are on your side! Take the first step towards debt-freedom today — Call now.