It’s easy to let debt get out of control. Aside from your mortgage and car payments, smaller obligations such as credit cards and unpaid bills can pile up—along with their typically high interest rates-to silently rob your savings every month.
One way to get out from under this rubble of uncontrolled liability is debt consolidation. Using the equity in your home to consolidate the other debts in your life can help you organise and eventually eliminate the nagging expenses you’ve been struggling to cover for years. This works by folding several different types of debt together into your existing mortgage and letting you pay them all down at the much more reasonable interest rate your mortgage lender offers.
Imagine that you owe $250,000 on your home. With a 3-year fixed rate of 4.99 percent, your monthly payments amount to $1,341. If, on top of that, you also owe $15,000 on your car at 10 percent; $20,000 in credit card debt at 18 percent, and another $15,000 in personal debt at 11 percent, just keeping track of all the payments you’re making can be a problem. Taken together, these secondary debts amount to monthly payments of $1,644. Added to your mortgage, these expenses push your monthly payments to $2,985.
Folding them all together into your low-interest home loan, however, frees you from the exorbitant fees and demanding repayment schedule associated with short-term debt. In the scenario above, simply adding the $50,000 in other debt to your mortgage raises your home loan payments to $1,609 and eliminates the monthly amount owed on all of your other debts. This one step has thus freed up nearly $1,400 each month to use as you see fit.
It goes without saying that cutting your monthly expenses by half brings tremendous relief all by itself, but there are other advantages to having that extra income every month. Lenders charge interest because money has time value. The sooner you control an amount of money, in other words, the greater the potential rewards. By folding all of your uncontrolled, high-interest debts into your mortgage, you take control of your finances and free up a sizable sum each month for keeping current on your bills, padding your savings account, and investing toward retirement.
Every homeowner’s situation is different, and the advantages of debt consolidation depend on your individual debt-to-assets ratio. As with every other aspect of the home mortgage industry, it’s always advisable to meet with an experienced broker who is able to guide you through the process, and who will help you understand your options.