Debt consolidation loan or mortgage financing can be done in a number of different ways, depending on your specific requirements and the property you have to work with.
The primary goal of any debt consolidation is to tap into the equity available in your home and utilize the incremental financing secured to pay down or pay off other debt obligations with higher interest rates and/or shorter repayment terms.
One of the main strategies employed by many home owners is to secure a new, larger first mortgage and use the proceeds to pay out the existing mortgage and the balance of funds to consolidate other debts into the new mortgage.
The advantages of this approach is the potential to secure excellent interest rates as well as a long term repayment plan. But there can also be disadvantages to this approach that need to be considered.
First, refinancing the first mortgage may trigger prepayment penalties which can be substantial if there has been a significant upward movement in interest rates since the time the old mortgage was written.
Second, if you’re gotten behind on short term credit and had your credit score negatively impacted in the process, you may be better off leaving the existing mortgage alone as your weakened credit profile could push you into higher rates.
In order to protect the first mortgage rate you already have, you could consider securing a 2nd mortgage or secured line of credit registered in a second position.
The big differences between a second mortgage and a line of credit are 1) the second mortgage will provide all proceeds at the outset while a line of credit allows you to draw on the approved limit when you need to; and 2) a second mortgage comes with a long term structured repayment schedule where a line of credit is open for principal repayment and does not require regular principal payments to be made in most cases.
If you’re unable to secure a second mortgage with a bank due to credit or financial profile issues, then a private second mortgage can be a very good option as well.
Yes, the interest rate is going to be higher than what you would be paying at a bank, but compared to credit card interest rates and heavy monthly repayment demands related to short term credit, a private second mortgage can make big difference in both the amount of interest you’re paying and your monthly cash flow as private mortgages tend to be interest only payments.
A debt consolidation mortgage via a private lender is effectively a bridge loan that will buy you time to either get lower cost financing through an institutional lender or sell your home in a fashion to get the highest available selling price as compared to a forced sale scenario.
Depending on your situation, there can be many different debt consolidation mortgage options to consider.
The best way to determine which approach makes the most sense for you and your family is to work through the different options and related number with an experienced mortgage broker that understands the different approaches to debt consolidation and who also has access to both bank and private lending sources.
If you would like to work through the different scenarios that pertain to your potential debt consolidation action, please give us a call and we’ll go over each one together in order for you better understand all your available options.