Is using the equity in your home to pay off high interest debt a sound decision?
Is using the equity in your home to pay off high interest debt a sound decision?
Have you, like many others, embarked on post-pandemic travel, indulged in luxuries such as a new car, exquisite meals, or even a beachside rental? Now, as the invoices accumulate, and the weight of this debt begins to tighten its grip, what can you do? Is there a way out?
There is. However, it requires a thorough analysis.
Using the equity in your home to pay off high-interest debt can be a sound decision in certain circumstances, but it's important to carefully consider the pros and cons before proceeding. Here are some factors to keep in mind when evaluating whether this is a sound financial move for you:
Lower interest rate: mortgage rates are still lower than the interest rates on credit cards, personal lines of credit, or other unsecured debts. By consolidating high-interest debts into a single mortgage with a lower interest rate, you can save money on interest payments over time.
Simplified payments: managing multiple debts with different due dates and interest rates can be challenging. Refinancing allows you to combine all your debts into one monthly mortgage payment, streamlining your finances, and making it easier to keep track of your expenses.
Reduced monthly payments: if you secure a lower interest rate or extend the repayment period through mortgage refinancing, your monthly payments may become more affordable. This can free up some cash flow, and ease financial strain.
Improved credit score: by paying off high-interest debts through mortgage refinancing, you can lower your credit utilization ratio, which may positively impact your credit score over time.
Long-term savings: while extending the repayment period through mortgage refinancing may increase the overall interest paid, it can still lead to long-term savings if the alternative was to continue paying high-interest debts over an extended period.
Extended repayment period: consolidating short-term debts into a long-term mortgage could mean paying more interest over the life of the loan.
Risk of losing assets: by transferring unsecured debts (e.g., credit card debt) to your mortgage, you convert them into secured debts – your home. If you're unable to make mortgage payments, your house could be at risk of foreclosure.
Closing costs: refinancing a mortgage typically incurs closing costs, which may offset some of the potential savings from consolidating debts.
Discipline required: consolidating debts is not a solution to overspending or mismanagement of finances. Without addressing the root cause of debt buildup, you may find yourself with more debt in the future.
Before you think about changing your mortgage to combine your debts, it is really important to look closely at your financial situation. Compare how much interest you would have to pay and any extra charges. Also, think about how it might affect your money in the long run. It is a good idea to talk to a mortgage broker. We can help you decide what to do by looking at your situation. Lots of people have been in your shoes, and we have already helped many of them get back on track with their finances, and spending. If you want us to help you too, just get in touch with us at Fred and Martin Mortgages. We will be happy to sit down with you and figure out if changing your mortgage to combine your debts is a smart choice for you. And guess what? It’s free and could save you thousands.
Fred and Martin