Did you know that you can combine all of your high-interest debt – including debt from credit cards, auto loans and personal lines of credit – into one low-rate mortgage loan? Well, you can. By consolidating debt in a secured loan, backed by the equity in your property, you can access interest rates lower than even a personal line of credit would allow.
Debt consolidation is helpful to people who can’t make their full monthly payments on time. With this option, you only make one reduced payment per month.
Why Consolidate Debt?
Lower your monthly payments
Consolidating debts into your mortgage allows you to lower your monthly obligation by extending your payback period.
Lower your interest rate
Mortgage loans carry the lowest interest rates as they are backed by an asset, your home, and are therefore much less risky in the eyes of banks.
Improve your credit score
By lowering your monthly payment and consolidating multiple payments into one, you are more likely to make every payment on time and in full. This will improve your credit score, giving you greater options with lenders in the future.
Debt Consolidation Options
There are three main ways to consolidate your debt into your mortgage.
Refinancing requires you to break your mortgage term early and consolidate your mortgage and other debts into one loan of up to 80% of your home’s value (otherwise known as the LTV, Loan-to-Value ratio). Since you are breaking a contract, you will incur a penalty. The penalty can range from three months’ interest with a variable mortgage to a more significant interest rate differential penalty with a fixed mortgage.
Home Equity Line of Credit (HELOC)
A HELOC is a line of credit backed by your home. It allows you to access up to 80% of your home’s value, minus whatever outstanding mortgage balance you may currently have. All HELOCs are variable mortgage rates and come with a slightly higher interest rate than a traditional 5-year variable mortgage rate.
As a HELOC is a line of credit, you are not advanced all of the funds at once. HELOCs give you the flexibility to access as much or as little equity as you wish. In addition, HELOCs do not require you to pay down a portion of the loan principle each month. Instead, your minimum monthly payment is an interest-only payment based on the amount you have withdrawn.
Although there can be legal fees associated with registering a HELOC, adding a HELOC on top of your first mortgage could help you avoid costly refinancing penalties.
The last debt consolidation option, a second mortgage, is often accompanied by a very high interest rate. Though second mortgages are not offered by all lenders, they do allow you to access more than 80% of your home’s value. If you are finding it difficult to qualify for a larger loan with your existing lender, then a second mortgage may be worthwhile. While second mortgages do come with higher mortgage interest rates, these rates are still usually lower than those of credit cards and personal lines of credit.