This is the conversation I have most often. Someone is carrying a couple of credit cards, a line of credit, maybe a truck loan, and the payments are technically manageable but there is nothing left at the end of the month. They have equity in their house and they have never really thought of it as available.
The arithmetic
Credit cards commonly sit around 19.99 percent. Unsecured lines of credit run higher than most people assume. Mortgage money is secured against your home, which is why it costs a fraction of that.
Take $60,000 of consumer debt at an average of 18 percent. Minimum payments alone can run well over $1,500 a month, and most of that is interest. Folded into a mortgage at current rates, the same $60,000 costs a few hundred a month in interest. The monthly relief is usually somewhere between $800 and $1,200, and for a lot of families that is the difference between treading water and getting ahead.
The honest trade-off
You are converting unsecured debt into debt secured by your home, and you are stretching a five year problem across a twenty five year amortization. Pay only the minimum and you can end up paying more in total interest even at the lower rate.
The move works when two things are true. You use the freed-up cash flow deliberately, whether that is paying the mortgage down faster or building a reserve. And you do not run the cards back up. I say that plainly because the second one is where consolidation goes wrong, and it is worth naming before you start rather than after.
How it gets done
Usually a refinance up to 80 percent of your home value, with the debts paid out directly by the lawyer at closing so nothing depends on follow-through. Sometimes a home equity line of credit instead, if you want the flexibility and can handle a variable payment. Occasionally a second mortgage, when breaking the first one would cost more in penalty than the consolidation saves.
What to bring to the conversation
A rough list of what you owe and to whom, your current mortgage statement, and a sense of what your home is worth. That is enough for me to tell you whether this is worth pursuing, usually in one call.
If you are carrying debt you would rather not be carrying, would it help to see the numbers laid out?
Lora Fenn, Mortgage Agent Level 1, Lic. #M25003153. Dominion Lending Centres YBM Group, FSRA #11129. 705-881-2780 · lfenn@dominionlending.ca
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