Should I Use My Home Equity to Consolidate Debts?
Debt consolidation often involves taking out a loan to pay back multiple different creditors.
This is usually subject to your credit score and requires you to have at least an acceptable credit history in order to apply for a debt consolidation loan.
Once you’ve calculated all of your existing debts and discovered how much you need to borrow, you’ll need to approach a lender to see if they’re willing to accept your loan amount and payment term.
To make this process easier, you would typically get in touch with a financial advisor such as Bankruptcy Canada to help you find the lowest interest rates.
However, since this method requires you to have a fairly solid credit rating, it’s a little difficult to secure a low-interest rate deal.
Thankfully, there are other alternatives that can help you consolidate and pay back your debts.
Need Help Reviewing Your Financial Situation?
Contact a Licensed Trustee for a Free Debt Relief Evaluation
Using home equity to consolidate debts
An increasingly popular option is to use your home equity to consolidate your debts.
This essentially means refinancing your home to consolidate debts into a single payment that is baked into your mortgage.
This is often a much better option than taking out a loan, especially if you already own a home.
Some alternative names for this include a home equity loan, home equity line or refinancing your mortgage.
How does it work?
A home equity loan is essentially a second mortgage.
It involves borrowing against the quality in your home to pay off other debts.
Equity refers to the difference between your home’s appraisal value and what you owe on it.
For example, if your home is appraised at $200,000 and you owe a remaining $100,000 on the mortgage, then you could borrow up to $100,000 with your home equity loan.
It is then baked into your mortgage and paid back in monthly installments.
This will put your house up for collateral and could increase interest rates, meaning that it might work out more expensive than a regular debt consolidation loan.
However, there are a couple of pros and cons to this that you want to consider.
Considerations before taking out a home equity loan
Before you consider using your equity for debt consolidation, here are a couple of considerations to keep in mind.
Interest rates for a second mortgage can be higher
While it can be enticing to use your home equity to pay off your debts, you can typically expect to pay more interest on your second mortgage.
You can get the same interest rates at your first mortgage, but this isn’t always possible and will depend on your personal circumstances.
If you do have to pay a higher interest rate, you’ll have the ability to set up a new due date or term to correspond with the payment terms of your first mortgage.
This can allow you to combine them with your bank’s best interest rates.
However, they can still offer lower interest rates
Although the interest rates might be higher on a second mortgage, it’s still a lot lower compared to paying back multiple lenders individually or even using a debt consolidation loan.
We’d always suggest that you speak to financial experts such as Bankruptcy Canada to learn more about debt consolidation solutions.
Your credit score doesn’t matter as much
While it’s still important to have a fairly stable credit score to take out a second mortgage to consolidate debts, you do offer your home as collateral which greatly increases the chances that you’ll be accepted.
This can be a good option if you’ve been rejected for a debt consolidation loan in the past and are looking for a more reliable way to pay off your existing debts in full.
You’ll get more flexible payment arrangements
You can often speak to your mortgage lender to organize flexible payment arrangements that are suitable for your situation.
You can extend the length of time you have to pay back the loan in order to create an ideal repayment amount and term that suits your needs.
However, do keep in mind that banks typically don’t like to do second mortgages.
While it’s possible for amounts over $10,000, you’ll have a lower chance of success with anything below that.
Remember that your house is collateral
Arguably one of the biggest concerns to think about is the fact that your house will be collateral.
If you can’t continue making payments to this second mortgage, then you risk foreclosure and losing your home.
Before you consider a mortgage, make absolutely sure that you’ve done your research and have spoken to financial experts like Bankruptcy Canada to learn more about your situation and if using home equity to consolidate debts is a smart choice for your situation.
You still need to address your debt problems
Even if you’re able to consolidate your debts using home equity, you can’t ignore the problem at hand which is your spending habits and poor budgeting.
Ideally, you shouldn’t end up in debt in the first place and that requires you to think more carefully about your spending habits.
While this is true for any type of loan or debt problem, it’s even more important when it comes to using home equity because it can feel like a large source of money that you can tap into, especially if you have a home with a high appraisal value.
Speak to Bankruptcy Canada for more advice
If you’d like to learn more about using home equity to consolidate your loans, don’t hesitate to get in touch with us today at Bankruptcy Canada.
We’ve helped over 100,000 Canadians with their financial woes and we’re one of the most qualified services to help with debt consolidation.
Contact us today via phone to book your free consultation with one of our specialists.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
How to Amend a Consumer Proposal
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
Consumer Proposal Eligibility
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?