Table of Contents
- Consolidation of Debt Using Home Equity or a Second Mortgage
- Why You Should Consider Home Equity Debt Consolidation
- How a Debt Consolidation Mortgage Works
- Secured Debt vs Unsecured Debt
- Types of Debt Consolidation Mortgages
- Consolidation Mortgage Benefits
Consolidation of Debt Using Home Equity or a Second Mortgage
The typical Canadian has almost $72,000 in debt and a third of this is non-mortgage debt. For example, a personal loan has substantially higher interest rates than an installment loan. A debt consolidation mortgage may be the answer if you want to pay off high-interest debt and own your house. See how these mortgages operate and what to consider before refinancing:
Why You Should Consider Home Equity Debt Consolidation
This involves consolidating many loans into one, generally with a cheaper interest rate. This allows you to pay off high-interest debt faster. Mortgage rates have been historically low for many years, with lenders providing rates around 2% (compared to credit cards, which normally range from 18% to 25%).
Consolidating debt into a mortgage saves money. Making a single mortgage payment rather than one for each obligation can reduce your total monthly payment. This may free up funds for bills, savings or investments. Consolidating debt might also enhance your credit score. Moving balances from credit cards and other high-interest obligations to mortgages can help.
How a Debt Consolidation Mortgage Works
When you combine debts using one of the mortgage choices listed below, the lender adds the money to your mortgage balance; the money is then utilized to pay off debts. Most mortgages include a clause requiring your lawyer to pay your creditors on your behalf. If they gave you the money, there’s a risk you’ll spend it on something else instead of paying off your debt. This would increase your mortgage amount and add to your current debt. As a result, the loan may be riskier.
Secured Debt vs Unsecured Debt
Before we discuss debt consolidation with a mortgage, it’s important to distinguish between secured and unsecured debt. A secured debt implies something valuable is used as security for the loan. For example, your house is the collateral for a mortgage. If you don’t pay your mortgage, the bank might foreclose on your house.
Unsecured debts do not need collateral; one example is credit card debt. In most circumstances, nothing secures your card debt. The credit card company allows you to “borrow” money at interest based on the likelihood of not paying it back. If you don’t pay the sum owed, they may seize property but not foreclose on your house.
Types of Debt Consolidation Mortgages
Not all mortgages are equal. You may use many mortgages to consolidate your debts, including:
- First Mortgage Refinancing
- Second Mortgage
- Reverse Mortgage
Another alternative is a home equity line of credit (HELOC). This resembles a mortgage in certain respects, but it offers different benefits.
