Debt Consolidation Loan (Mortgage Refinance)
Debt Consolidation (also called refinance) is a transaction in which new mortgage amount is greater than the existing mortgage amount. Extra money from new mortgage amount is used to pay off credit cards, car loan, student loan, retail cards and other loans. Debt consolidation loan can reduce your monthly payments by 20% - 55%.Monthly payments go down considerably because of lower interest rate and longer repayment period.
- Debt consolidation loan offers one fixed monthly payment.
- Debt consolidation loan reduces monthly payments by 20% - 50%.
For example, if your home mortgage is $100,000 and you own $20,000 on credit cards, debt consolidation will increase your mortgage to $120,000. That extra $20,000 will be used to pay off credit cards and as a result monthly expenses will go down, because mortgage interest rates are lower.
To qualify for debt consolidation loan you need own a home and have some home equity. Home Equity is value of your home, minus all money owed on it. For example, if your property is worth $200,000 with a $130,000 mortgage, then your home equity is $70,000.
You can consolidate credit cards, student loans, retail cards, car loan, credit lines, and other debt.
Before Debt Consolidation Loan
| Balance | Interest Rate | |
|---|---|---|
| Home Value | $300,000 | |
| Mortgage | $140,000 | 7.8% |
Debt |
||
| Credit Cards | $20,000 | 21.0% |
| Monthly Payments | ||
| Mortgage | $1050 | |
| Credit Cards | $556 | |
| Total | $1606 | |
After Debt Consolidation Loan
| Balance | Interest Rate | |
|---|---|---|
| Home Value | $300,000 | |
| Mortgage | $160,000 | 6.5% |
Debt |
||
| Credit Cards | $0 | |
| Monthly Payments | ||
| Mortgage | $1071 | |
| Credit Cards | - | |
| Total | $1071 | |
| Savings | $535 | |
Example above uses 25 year mortgage. Credit card payment calculations use minimum payment calculation of 2.78% with 21% compound interest rate. Table shows monthly minimum credit card payment of $556.00 for the first month, which goes down by approximately $4 - $8 and stretches for 446 months. Calculations made using Bank rate credit card calculator.
Monthly savings of $535 on debt payments, which is 34% less than before debt consolidation loan.
Debt Consolidation Loan and Advantages and Disadvantages
Advantages |
Disadvantages |
| Pay one fixed payment, on the same date each month. It's convenient and easy to manage. | Since debt consolidation loan pays off all debt and offers low monthly payment, you may be tempted to use credit cards again. If approached carelessly you can get into more debt. It's best to close all credit cards and avoid new ones. |
| All creditors are paid off in full. | Lender will not tolerate missed payments. If you miss monthly mortgage payments lender has rights to take away your home. You cannot ignore payments like credit cards. |
| Interest rates are lower than on credit cards, car loans and student loans. As a result monthly payments go down. | |
| If you pay on time your credit score will go up. |
Debt Consolidation Loan Costs
Debt consolidation closing costs are similar to first mortgage. In fact you will go through almost exact procedure as with your first mortgage. Closing costs add up to 2% - 5% of the entire loan. Use table below only as a rough estimate. Learn more about mortgage closing costs.
Fee |
Approximate Cost |
|---|---|
Appraisal Fee Appraisal estimates dollar value of your property by comparing it to similar properties in the area. Find independent, legal appraisers at Canadian National Association of Appraisers |
$300 - $500 |
Survey Fee Survey is a comprehensive inspection of the property. It examines foundation, building structure, pipes, electricity and gas. |
$350 - $400 |
Property Insurance (Home Owners Insurance) This insurance protects against fires, floods and other disasters. |
$300 to $850 |
Attorney Fees Lenders hire lawyers to ensure transactions are legal and in compliance with lender requirements. As a borrower you have to pay for lawyer expenses. |
$500 - $800 |
Title Search Your home had many owners. Banks, government, construction companies and other home owners. Title search ensures that you are the only lawful owner of the property. It also checks for mistakes to prevent future problems. |
$50 - $200 |
Title Insurance Title insurance protects you to the full cost of the property in case a person or a company emerges and claims ownership of the property. For example daughter of the previous owner shows up and states she owns the property because her father used to. If she wins the case in court, title insurance will pay lender whatever home is worth. Title insurance only covers lenders. You need to arrange your own. |
$300 - $ 500 |
Loan Origination Fee Origination fee is charged for lender's work in evaluation and preparation of your mortgage loan. |
Approximately 1% of the loan |
Prepayment Penalty All lenders charge a prepayment penalty for ending mortgage contract earlier (mortgage refinance). Prepayment penalty is worth 3 months of interest payments. |
3 months of interest payments. |
Avoiding Debt Consolidation Closing Costs
Adding Costs to Your Loan
If debt consolidation loan is for $120,000 and closing costs are $3,000 lender can add it on top and lend $123,000 instead. Lenders charge interest on added amount.
Adding Costs to The Interest Rate
Another way to avoid costs is to select a lender who will offer slightly higher rate, but will not charge closing costs. With this method there are no additions to your mortgage balance, instead lender covers closing costs by charging you a higher interest rate.
With both methods you end up paying closing costs over time. Learn more about mortgage closing costs. Apply with MortgagesCanada.ca to avoid closing costs.
Qualifying for Debt Consolidation Loan
You must have at least 10% home equity.
At least 650 credit score (learn more about credit score).
Add together your total monthly mortgage payments, credit card payments and other loan payments. Then divide that number by your monthly income. If you get 0.50, then debt consolidation loan is for you. If the number is less than 0.50 we can still help you save money.
Be prepared to provide letter of employment, proof of income, property details, SIN, T1 Tax form, annual mortgage statements and more. Check all documents needed for a mortgage.
- Make sure to list all your credit accounts to the lender.
- Lender may close all your credit cards, store cards and other credit accounts to ensure you don't get in debt again.
- Shop several mortgage lenders and compare interest rates.
- Before signing a contract review it carefully. Verify interest rate, conditions, loan period, fees and other factors. If lender tries to rush you through - watch out.
Credit Counseling vs Debt Consolidation Loan
Credit counseling companies contact your creditors and negotiate lower interest rates. They also look for debt consolidation loans to put all your debt into one monthly payment. Credit counseling companies receive a percentage of your monthly savings, so if for example you save 30%, they will take away 5% (or more) every month, for agreed period.
Credit counseling helps if you have no home equity. Home Equity is value of your home, minus all money owed on it. For example, if your property is worth $200,000 with a $130,000 mortgage, then your home equity is $70,000. It's hard to get debt consolidation loan without home equity, because mortgage lenders require your house as a security for the loan.
There's no point in credit counseling if you have home equity. Credit counseling companies will simply find a debt consolidation loan and then charge you monthly fee. You can get debt consolidation loan yourself.
Will Debt Consolidation Get Me Out of Debt?
It will help if you don't get into more debt after getting debt consolidation loan. Sounds logical, but it's tempting, especially if you have spending problems. For example, if debt consolidation loan lowers your monthly payments from $1780 to $1345, suddenly that's extra $435 bucks per month. Some people act foolishly and get more credit cards, going even deeper in debt.
If you get debt consolidation loan, do yourself a favor - stay away from credit cards. Use that extra money to eat nicer meals, save for vacations, to buy clothes, or whatever it is you like, but don't get into debt again, because If you do, you can end up worse off than before, owing twice as much money.
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Explore More Debt Consolidation Resources
- Cash-out Refinance Mortgages - Freddie Mac
- When is cash-out refinancing a good option? - bankrate
- Debt Consolidation Refinance - Pros and Cons
- Debt Consolidation With a Cash-Out Refinance - Mortgage Professor
- Pros and Cons of Debt Consolidation - Mortgage Professor
Debt Consolidation Forums
Refer to these forums for debt consolidation assistance from other people. Please note that forums are in US, and Canadian mortgage system slightly differs. Ask us a question first if you need to.
Mortgage interest rates are subject to change without notice. We attempt to maintain accuracy on our website, however, mortgage information on this website should be used only as a guideline. Please consult a mortgage professional before taking any action.
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Term |
Rate |
Variable |
2.05% |
1 Year Closed |
2.54% |
2 Year Closed |
3.09% |
3 Year Closed |
3.50% |
4 Year Closed |
3.99% |
5 Year Closed |
3.89% |
7 Year Closed |
4.99% |
10 Year Closed |
5.35% |
Rates Updated:
|
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