During the early days of the mortgage business, brokers would require a lot of paperwork…
Now you can listen to our blog post, “Is It a Good Idea to Refinance Your Home to Pay Off Debt?” while on the go.
If you have a mortgage on your home and are struggling to make ends meet, refinancing your home with a lower interest rate might seem like an ideal solution. With the reduced monthly payments, you’ll have more money in your pocket each month and can pay off all your debts faster.
Refinancing might be the right option if you have home equity and can secure a new loan at a lower interest rate. However, this step is not suitable for everyone or every situation. Let’s take a closer look at whether refinancing is right for you.
Can I Refinance to Pay Off Debt?
Refinancing a mortgage is not as simple as it sounds. In Canada, you can refinance your mortgage only if you meet certain conditions: You must have good credit and meet the lender’s loan-to-value ratio and equity requirements. If you do, refinancing can give you lower monthly payments and a shorter term or lower interest rate.
To understand when to refinance is worth it, check out this article. Unlocking the equity in your home by refinancing or selling is a good option if your mortgage balance (loan principal plus original first mortgage) is less than 80% of the home value. This means you have more equity than debt after subtracting other liens like second mortgages or home equity loans. If your property value has increased since taking out the mortgage, you might want to sell and buy again with a smaller mortgage.
Who Should Refinance Their Mortgage?
Refinancing your mortgage is a cost-effective way to lower your monthly payments, reduce the length of your loan and get access to additional cash. However, it’s not an option for everyone or every mortgage.
Refinancing is not available to all home buyers; it’s a privilege that banks grant you based on a set of criteria. The process involves a new loan with different conditions and terms so, if your bank is offering you to refinance your mortgage, then you must avail it.
How a Mortgage Refinance Works
1. Calculate the approximate value of your home.
2. What is roughly 80% of the value of your house?
Since 80% is often the maximum mortgage amount for a home, that is roughly how much we have to deal with for your refinance.
3. How much of your current mortgage is still unpaid?
4. From the 80% worth of your house, deduct the amount still owed on your current mortgage (the first thing we need to do is pay out your existing mortgage).
5. The outcome determines how much extra home equity you will have to work with.
6. You can pay off bills, make improvements, make investments, or do whatever else you’d like with the extra home equity. The total amount of available equity DOES NOT HAVE to be used.
Refinance Mortgage to Consolidate Debt
- Think about the distinction between reducing your credit limit and cancelling your account.
- Request this from your Broker or Lender if you want a certain credit card or credit line to stay open/accessible after the refinance is complete; otherwise, it can be closed indefinitely.
- Consider raising your mortgage payment to catch up on your mortgage faster if your total monthly payment decreases as a result of no longer having to make loans or other credit instalments.
- You will still benefit from making a single, straightforward payment if you increase your mortgage payment, and you will pay off your loan more quickly, which will result in even greater interest savings.
- In the event of a cash flow problem or an emergency throughout the term, you can turn off and on these extra mortgage payments if they are set up properly utilising mortgage pre-payment capabilities.
Mortgage Refinance Pros and Cons
Interest rates are the key justification for proceeding with a cash-out refinance to pay off your credit card obligations. Credit card interest rates can be as high as 30%. Mortgage interest rates, on the other hand, are often substantially lower today.
Your credit scores could be boosted by paying off all of your credit card debt. However, some lenders may require shutting your credit card accounts after paying them off. This could lower your credit scores, especially if the accounts are old and add to your credit history.
There are a number of possible difficulties that consumers who refinance their mortgages to pay off credit cards may encounter. For instance, if you do not alter your spending patterns, you risk adding new credit card debt to your existing (likely higher) mortgage payments. Additionally, because they are now a part of your mortgage, you will end up paying for the purchases that caused you trouble over a much longer period. Cash-out refinancing also reduces your equity, meaning you own less of your house.
Want to Refinance your Mortgage or Need Some Quick Cash? Let Us Help!
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