What’s My Best Option for Consolidating Debt?

Many mortgage borrowers are weighing their options when it comes to debt consolidation to help ease monthly financial obligations, which can empower you to both save money and improve your cashflow in one move.

Accessing home equity is a popular and cost-effective way to consolidate payments and efficiently eliminate debt as well as the stress and burden that comes along with debt. There are a number of solutions available, so it’s important to discuss all options with your mortgage agent and find the one that makes the most sense for you.

Here are four options you may want to consider:

1. Mortgage refinance. One of the most common ways to consolidate debt using your mortgage is through a refinance. This involves breaking your current mortgage agreement and rolling your outstanding debt into a new one, resulting in one easy payment, and at a lower interest rate than unsecured credit such as credit cards and car loans. Your outstanding mortgage balance will be higher, but you’ll have peace of mind knowing that your debts are repaid. Typically, your lender will arrange to pay your creditors on your behalf. There may be a financial penalty for breaking your existing mortgage early, however, but it could still be advantageous to do so in order to pay off your higher interest debt right away. Your mortgage agent will do the math and help you decide if this is the best route.

2. Home equity line of credit (HELOC). Another way to alleviate financial struggles is through a HELOC, which is a line of credit using your home’s equity as security that you can draw from for debt repayment. Unlike a typical loan, you don’t receive all the funds at one time. You access as much as you need and you’re only required to pay interest on the amount withdrawn. As you make payments, the credit revolves and becomes available for you to use again. And because the credit is secured by your home, the interest rate is lower than what you would pay on an unsecured loan. Since you’re only required to make interest payments on the money borrowed, however, it’s important to have a repayment plan in place so you’re not continually paying interest.

3. Home equity loan. Similar to other types of loans, a home equity loan provides you with a one-time lump sum based on your available equity, which you can then use to repay your debt. Depending on your available equity, the amount you can borrow could potentially be much higher than with a personal loan. Similar to a HELOC, your home is used as collateral and, therefore, the loan itself carries less risk and lower interest than other loans. You’ll have a structured repayment plan over a set period of time and, with each payment made, you’ll reduce the balance as well as the interest, which is usually at a fixed rate.

4. Reverse mortgage. In you’re a homeowner at least 55 years old, a reverse mortgage may allow you to borrow against the equity in your home. This type of financing doesn’t require you to make regular monthly payments like you would with a traditional loan, which frees up money to then be used towards debt repayment. A reverse mortgage is only paid back when you sell or leave the house and, although interest rates tend to be a bit higher than with a traditional loan, they’re offset by the fact that repayment isn’t required until the loan comes due.

Once you’ve used a debt consolidation strategy, it’s important not to fall back into a habit of over-extending your finances or racking up credit cards simply because they’ve been paid off. This is your chance to have a fresh start and work towards financial freedom so you’ll be well prepared for the future.

Have questions about debt consolidation? Answers are a call or email away!