“I have already done two debt consolidations, can I get a third? asks Lyne-Marie, suffocated by her short-term financial obligations. I still have equity in my home that I haven’t used.”
Debt consolidation consists of grouping high-rate debts and repaying them by taking out a loan at a lower rate.
As for net worth (equity), it corresponds to the difference between the value of the house and the balance of the current mortgage. For example, the equity in a $400,000 home with a $100,000 mortgage attached is $300,000.
Several options are available to Lyne-Marie.
- Borrow against the equity in your property by taking out a second mortgage
- Get a home equity line of credit
- Refinance your mortgage loan
Equity Borrowing
The main advantage of this option is to keep intact the first mortgage contracted a few years earlier when the rates were lower.
In the case of a second mortgage, interest is sometimes payable in the short term, depending on the structure of the loan, and administrative fees to set up the loan may apply. The interest rate on the second mortgage is usually higher than your original mortgage. This is the case since they present more risk for mortgage lenders.
Home equity line of credit
Like the previous option, this one has no impact on the current mortgage. The margin can reach up to 65% of the equity, but the total of this combined with the balance of the mortgage must not exceed 80% of the value of the house.
In our example of the $400,000 house with a $100,000 mortgage, the margin would be $195,000, or ($400,000 – $100,000) X 65%.
The margin therefore provides access to large sums that can be spent as desired. Administrative fees may also apply.
Refinancing
This option allows you to obtain up to 80% of the value of the house. However, the current mortgage no longer holds, which is a shame if its interest rate was low. On the other hand, you can probably negotiate a blended rate. In addition, provide for penalties in order to terminate the existing mortgage and administrative costs.
In conclusion
My answer to Lyne-Marie’s question about whether it’s a good idea to do a third debt consolidation is “yes, but…”. Indeed, it is the thing to do to get out of trouble in the short term, but it is not usual to carry out debt consolidations repeatedly, unless exceptional events occur. We must therefore reduce our consumer spending and better manage our personal finances, otherwise we will always fall back into the same predicament. Discipline is required.
Advice
- Put your credit cards away for a while. Several financial institutions allow them to be deactivated online.
- Postpone some non-urgent projects.
- Set a budget and stick to it. Seek the help of a financial advisor if needed.
2023-07-30 04:02:18
#debts #suffocating #house
