DEBT CONSOLIDATION

Did you know that Debt Consolidation allows you to 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!

 

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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?

Debt Consolidation Options

There are three main ways to consolidate your debt into your mortgage.

Refinance

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 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 Instead, your minimum monthly payment is an interest-only payment based on the amount you have withdrawn.

There can be legal fees associated with registering a HELOC. Although adding a HELOC on top of your first mortgage could help you avoid costly refinancing penalties.

Second Mortgage

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.

Comparing Options

Option Refinance HELOC Second Mortgage
Max LTV 80% 80% 80%
Interest Rate Low Mid High
Type of Rate Variable or Fixed Variable only Variable or Fixed
Breakage Penalty Yes No No
Legal Fees Yes Yes Yes
Full loan amount advanced up front Yes HELOCs allow you to draw down

equity at your discretion

Yes
Minimum Payment Interest + Principal Interest + Principal Interest + Principal