May 17, 2019 Kristen Godel

What to Know About Debt Consolidation

Consolidating debt is simply a method of taking all the outstanding debts that you owe and paying them out with one larger loan. When it comes to consolidating debt, leveraging the equity in your home can be a great way to lower monthly payments. In today’s market, most institutional credit card interest rates average 20% while retail credit cards are averaging over 25%. This means that the unsecured debts can be often overwhelming and monthly minimum payments just won’t be effective enough to chip away at the principal owing. Since mortgage rates are consistently lower than the rates of most unsecured loans/credit cards, it naturally lowers the monthly payment obligations to the overall debts while lowering the principal owing at a much faster rate.

An additional benefit is that this would eliminate the individual payments of the smaller loans and create one installment instead. In our experience, missing regularly schedule payments sometimes has to do with keeping track of all the payments and not necessarily the individuals ability to make the payment. This is why consolidating debt would provide an added value of simplicity and not just lower payments.

Consolidating debt using your homes equity is typically done by doing a refinance of your existing mortgage or by taking on an additional mortgage such as a second mortgage or third mortgage. Below is a scenario of a person who has unsecured debts who might benefit from taking a second mortgage in order to lower payments and increase monthly cashflow:

Outstanding debts:

Debt Balance Interest Rate Minimum Payment
Bank Credit Card $10,000 20% $166.67
Personal Loan $20,000 20% $333.33
Retail Credit Card $5,000 29% $120.83
Line of Credit (Unsecured) $15,000 15% $187.5
TOTAL:

$50,000

TOTAL: $808.33

 

In the above scenario, the individual owes $50,000 with a total minimum monthly payment of $808.33. If we were consolidating debt into a mortgage at a rate of 5% amortized over 25 years, the minimum monthly payments of the combined debt would only be $292.30. That’s a total difference of $516.00 per month. This would allow this person to not only have one monthly payment but also increased cash flow on a monthly basis which could lift the stress/burden of payments going forward.

 

If you are interested in learning more about consolidating debts or discuss your personal options in consolidating debt, please give us a call and we would be happy to help! 905.455.5005