On the surface, your mortgage may be a long-term investment or a way to save for your future. But a mortgage is more than what meets the eye. Even though a mortgage is itself a loan, similar to other types of debt, it can actually provide you with the opportunity to save money and can help pay off other household debts you may have.
If you have a high amount of debt such as credit card debt or personal loans, you can consolidate these debts into your mortgage and pay a smaller monthly amount than you would be paying off multiple loans on a monthly basis. This will take a lot of pressure off of your finances while freeing up cash flow for the more important things in life.
This all sounds great, but how can it be accomplished? Well, it can be done with a little thing called mortgage refinancing.
Why refinance your mortgage?
Mortgage refinancing is when you pay off your existing loan and replace it with a new one. There are many reasons why a person may choose to refinance their mortgage such as obtaining a new and lower interest rate or switching to a fixed or variable rate mortgage. People also choose to refinance their mortgage to tap into their home equity. Whether that is to fund a home renovation project, pay off a financial emergency, or consolidate their debts.
What are the benefits of consolidating debt using your home equity
Many homeowners refinance to consolidate their debt. If you have a lot of outstanding debt with high interest rates, you can consolidate those debts by using your home equity and repaying it in one easy, low-interest payment. Sounds simple enough, right? At face value, replacing high-interest debt with a low-interest mortgage rate is a good idea
What are the risks involved with using home equity to consolidate debt
While consolidating your debt using your home equity can save you a lot of money, it can only do so if it is done correctly. Yes, combining your debts into one, easy, low-interest payment can ease your finances, however, it isn’t always the smartest move in the long term.
If you have, say, $50,000 in credit card debt and are spreading it out over 20 or 25 years, you will need to do the math and ask yourself: how much interest am I going to have to pay on that debt over that amount of time? Yes, you’re paying less in interest, but you are likely going to be paying that money back over a longer period of time which could add up. So, how much money will you really be saving?
Many people who use their home equity to pay off their debts also make one very small but critical mistake. They think that now that their monthly payments are smaller, they now have more money to spend on whatever they want. Just because your credit card balances are paid off, doesn’t necessarily mean that debt is gone. That debt has only been moved, and it still exists. Without proper money management or a strong financial plan in place, many people make the mistake of racking up their debt again because their mortgage refinancing gives them the available credit to do so.
Not to mention that there is more at stake when you consolidate your debt using your home equity. If for example, if you are not making your credit card debt payments on time, the repercussions are usually penalty fees or fines. However, if you are unable to make your mortgage payments, the consequences could be direr, and you could face the foreclosure of your home.
Is mortgage refinancing the right option for you?
The answer to this all depends on your current situation. If your debt has reached a state of financial emergency and you need to start paying it off before it wheels out of control, then refinancing your home may be the right choice for you. However, if your plan is to refinance your mortgage and begin piling up those debts again, using your home equity may not be the right debt consolidation method for you.
If you would like to learn more about consolidating your debt by refinancing your home, I can help. Don’t just think of me as a mortgage broker, but as your financial partner as well. If you are facing high levels of debt and you’re not sure how you’re going to pay it off, let me help you review your options to see if mortgage refinancing is the right answer for you.
To get started, you can book a free consultation with me today by giving me a call at 705.315.0516. With the right financial plan and the right financial advisor on your side, there are always options to deal with your debts.