I help a lot of homeowners with debt consolidation through a home equity loan as an Ottawa mortgage broker. It’s a step that can be beneficial when done in the right circumstances. This is why it’s important to talk to a broker before you choose this option. You want to make sure you are choosing the right package for your needs. You also need to be disciplined and committed if you want the most benefits from your debt consolidation.
How Does Debt Consolidation Work?
The goal behind debt consolidation is to take all of those high-interest credit accounts and combine them into one lower interest payment. High-interest debts are your unsecured loans, credit cards, car loans, and student loans. These tend to have a much higher interest rate than a debt consolidation/home equity loan. All of the outstanding balances of your debts get rolled into one mortgage refinance loan with a low-interest rate to help you save money.
Pros and Cons
It’s important to look at the pros and cons of debt consolidation to understanding what the advantages and disadvantages are.
- You can pay off your debts and secure a much lower interest rate
- It will reduce your monthly payments
- It helps to raise your credit score
- With an extended mortgage period, you end up paying more over a full term
- If you default it will put your assets and home in jeopardy
- This type of loan tends to have a higher rate of failure to pay
If you have a steady and stable income, and decent credit history, it can make sense to take out a debt consolidation loan. Let’s say you have 5 credit cards that have interest rates ranging from 20% to 25% and all of those credit accounts are near their limit. It will take you ages to pay these off and you will be paying a huge amount of interest over time.
If you took all of those debts and moved them into one home equity loan with an interest rate ranging between 4% and 8%, you will be paying less interest that can then be put towards the principal of the loan, which means you can pay it off faster.
Improve Your Credit Score
When you consolidate your debt in this way it helps to lower the percentage of the credit that you are utilizing, which is positive for credit scores. The big mistake many people make, however, is to consolidate their debt and then run those credit cards up again. So now, you have those high-interest rate cards to pay off as well as the new home equity loan, putting in worse shape than you were before you took that loan out.
For debt consolidation to work, you have to be committed and keep to your payment plan. You need to create a budget and get your spending under control so that you don’t put yourself in the same position you were in. When done the right way, it can make a huge difference to your monthly payments and help you save over time.
If you are thinking about taking out a home equity loan for debt consolidation, give our Ottawa mortgage broker team a call today at (613) 440-0134.