Refinance and Use the Equity in your Home to Consolidate your Debt.

Darcy DoyleBlog, Interest Rates, Mortgage Tips

Refinance your Home Equity

In this current inflationary market, rising costs of living can make it difficult to manage your finances. Debt consolidation can help if you have an existing mortgage, high-interest credit card balances and personal loans. However, if you have equity in your home, you can utilize it to your benefit. Equity is the difference between the value of your home and the amount you owe on your mortgage. You can combine all of your debts into one payment by consolidating them. To do this, we can refinance your mortgage and/or add a Home Equity Line Of Credit (HELOC).

What is Debt Consolidation?
And how can Refinancing your home help?

Debt consolidation is a form of debt financing that combines two or more loans into one. This is a great option if you have multiple high-interest loans where you are able to pay the interest rather than the principal. If you own your home and have more than 20% equity in it, keep reading. A debt consolidation mortgage gives you the funds needed to pay off several debts at the same time. Once your non-mortgage debts are paid off, it leaves you with just one loan to pay. Reducing the stress involved with managing monthly payments to multiple creditors. 

To consolidate your debt, we simply refinance your current mortgage into a new mortgage. Where the principal will equal to and beyond the total amount you currently owe. When you refinance, you can get up to a maximum of 80% of the current market appraised value of your home. Minus the existing mortgage amount remaining. The difference between the existing mortgage and the new mortgage will be the available funds used for paying the debt and/or adding a HELOC. Debt consolidation is a great way to streamline your finances during times with the increased cost of living. Before you cash out your home equity, or refinance your mortgage, it is important to learn more about managing your debt. Everyone’s financial situation and homes are different. We suggest that you contact a Mortgage Professional to determine if refinancing your existing mortgage is the right decision for you. 

Debt Consolidation through equity refinancing

Before your Refinance

You must consider a few factors when refinancing with the goal of consolidating your debt. Consolidation does come with a structured payment plan and an assured repayment date. Depending on the term negotiated, payments may be made weekly, biweekly, semi-monthly, or monthly. It is important to note that there may be refinancing fees. Including a penalty to break the existing mortgage, appraisals, title searches, title insurance, and legal fees.

Why consolidate debt into a Home Equity Line of Credit (HELOC)?

As you pay off your mortgage and your home increases in value, your home equity amount increases. Home equity is the difference between the value of your home and the balance remaining on your mortgage. Home equity can be used to increase your mortgage amount or add a Home Equity Line Of Credit. Similar to a debt consolidation mortgage, which consolidates your debts into one payment. 

With equity lines of credit, the lender uses your home as security. Home equity lines of credit have a slightly higher interest rate than a conventional mortgage. As it is revolving which means that it can be used and re-paid an unlimited amount of times and is fully open to full prepayment without penalty. Since it is secured to your home and based upon available equity amount, lenders are more likely to give you a higher credit limit if you qualify. So you can take advantage of this available credit by using it to pay off your higher-interest rate credit cards and loans. You can borrow up to 65% of the appraised value of your home with a home equity line of credit (HELOC) and up to 80% when you combine it with a traditional closed mortgage installment product. 

Benefits of debt consolidation with a Home Equity Line of Credit:

  • Flexible repayment options
  • Lower interest rate
  • Lower monthly payments
  • No prepayment charge
  • Only pay interest on used funds 
  • Pay off debt quicker
  • Possible tax deductions
  • Reusable credit

Factors to Consider When Consolidating Debt into your Mortgage

In determining whether a debt consolidation loan will benefit you in the long run, many variables must be considered. Each mortgage scenario is as unique as you are, and there are just too many variables to provide a straightforward answer.  It is also important to consider the new mortgage rate you will get on the renewal. Is it higher or lower than what you’re paying now? If it’s more, will the decrease in interest on your non-mortgage debts outweigh the increase in mortgage interest you’ll have to pay? 

Additionally, there are penalties for breaking your current mortgage as well as appraisal and legal fees. To really know if consolidating debt into your mortgage is the best choice, you’ll need to consider the costs associated with refinancing to consolidate your debt. 

Vacation Homes & Recreational Properties

Debt consolidation through equity refinancing

If you are dreaming of your very own vacation home, there are ways to make it happen! Let me walk you through your options. When it comes to taking on a vacation property, you will need to have a minimum down payment of 5% of the first 500k purchase price and 10% of the price up to a maximum of 1 million purchase price. If exceeding 1 million purchase price, then a minimum of 20% down is required. In addition to the down payment requirement, you will also need to pass the debt to income stress test, and prove that you can financially carry the mortgage of your existing primary residence and your new vacation home. 

When purchasing a vacation home or property, most lenders will allow you to draw out the equity in your current home. The Equity can be used as a down payment for a second home. This is done through mortgage refinancing. This means getting a re-evaluation on your home and then refinancing the mortgage based on the current value. This will allow you to tap into the equity your home has built over the years, and pull out the extra funds required for a downpayment on your secondary property. Please keep in mind that when using some of your current equity, it will increase the principal amount and the interest payments on your existing mortgage as the mortgage are now refinanced at a higher amount. 

Using a HELOC to finance your Second Home

Another option to unlock your home equity is through a line of credit or a HELOC (Home Equity Line of Credit). This option allows you to borrow money using the equity in your property, with the property as collateral. A HELOC serves as a revolving line of credit to allow the borrower to access funds, as needed. Letting you utilize as much (or as little) equity as required. In Canada, you are able to borrow up to a maximum of 65% of your home’s value into a HELOC. However, keep in mind that your HELOC balance AND current outstanding mortgage cannot exceed 80% of your home’s value when added together. 

If you are ready to purchase a vacation property, I would love to help review your financial situation! I would be happy to take a look at your current mortgage, and equity and review your options to help you find the best fit. The keys to success are right around the corner with a little bit of expert advice.

Selling your Home

The housing market continues to favour sellers as we move into the summer months. If you’re thinking of selling, this is a great time to do so! Not only will your home likely be listed on the market for a shorter period of time, but most sellers are currently receiving multiple offers on their sale. This is due to the increasingly high demand for housing with limited homes currently available on the market.

However, even in a seller’s market, there are some things you can do to help improve your chances of selling your home and getting the best offer! Here are some tips for selling your home in a seller’s market:

List Your Home on a Friday

Depending on the location, Friday is typically the best day of the week to put your home up for sale. Most individuals have weekends free or can take Fridays off early should they be interested in a home for sale! Be sure to include multiple photos of the home in your listing. Or even a virtual tour video if possible, to get your listing off on the right foot.

Offer Limiting Showings

Another good strategy for maximizing your offers in a seller’s market is to limit your showings. Restricting the hours and days that you show your home will allow you to have multiple buyers touring at the same time. This creates quiet competition as the buyers know other individuals are interested.

Lower the Sale Price

While not always necessary, lowering the sale price can make your home even more attractive to potential buyers. If you get multiple buyers interested, it will leave some wiggle room for buyers to bid over the asking price.

Make the Most of a Bidding War

If you do end up with a bidding war on your home, you will want to make the most of it. Firstly, always inform buyers of the competition and encourage stronger offers. Secondly, respond to one offer with a counteroffer and set the others aside until you get a response. Thirdly, accept the best offer.

However! Keep in mind that the highest offer might not always be the best one. Some things to keep an eye out for that are conducive to a ‘strong’ offer. Including a cash offer, a large down payment, few to no conditions and flexible moving date.

If you’re looking to sell this year, make sure you utilize a top realtor who can help you navigate the current market settings so that you get the most out of your home! And don’t forget to reach out to your mortgage professional for all the information about moving and how that affects your mortgage.

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