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When compared to other loans or lines of credit, a home equity loan is typically regarded as a smart financial maneuver.  The logic is straightforward: using an existing asset for financial gain or help is smarter than simply borrowing money from a lender such as a bank.

Let’s look at some specific reasons as to why leveraging your home equity is a smart play if you understand how these loans work.

It’s a Return on your Investment

This isn’t to suggest that a home equity loan is providing a dividend, because it’s not. What this means is that every month as you pay off the debt of your mortgage, you are building up equity. This equity is incredibly handy when you need a cash influx. Your home is your investment; it should be working for you.

Use it on the Appropriate Necessities and you won’t Regret the Decision

There are acceptable reasons to dip into your home equity, and if you don’t stray from these legitimate reasons then you most likely won’t experience regret.

The usual suspects are a medical emergency, home repairs, post-secondary education or maybe even to start or expand your business. A home equity loan is usually considered a good source to fund the above-mentioned expenses because they fall into the needs category and not the wants category.

Home Equity vs. Line of Credit

Lines of credit can be a viable and useful part of a financial strategy. The best part is that you only repay what you use. In most cases, the average line of credit provided by banks carries a bit more risk for borrowers that a home equity loan due to higher interest rates and less flexibility.

Avoid the Less than Smart Plays when it comes to Home Equity Loans

Anything to do with buying frivolous items with your home equity is a bad idea. Boats, cottages, cosmetic items or travel are not recommended uses. Using it for non-essential items can come back to haunt you.

Using the equity you’ve built up in your home in responsible ways can be an intelligent move and one that comes with reduced risk and won’t result in high levels of stress.

Refinancing a Mortgage to Consolidate Your Debt

Is it a good idea to refinance a mortgage to pay off credit card debt? If you own a home and have more than 20% equity in the property and are saddled with credit card debt, student loan debt, or other consumer debt, it might be time to refinance and consolidate your debt.

Why? Mortgage rates continue to be near record lows while interest on consumer credit cards can be in excess of 25%. Moreover, credit card debt is a problem for a lot of Canadians. Canadians now owe $1.67 for every dollar the earn. At the end of 2016, the average credit card balance was up 2.3% year over year at $4,094.1

While everyone knows they have to eventually pay that debt off, many are not aware that they cost of carrying that debt is going to rise. Interest rates are expected to gradually rise with debt serving costs projected to rise to 16 cents for every $1.00 of income by the end of 2017—it is currently at 14 cents. This may not sound like a lot, but it would represent a new record high. Unfortunately, this increase comes at a time when wage growth is almost non-existent.

A lot of Canadians burdened with high-interest credit card debt think the best way to settle the issue is through bankruptcy. But bankruptcy should only be considered as a last resort. Other debt relief ideas that you should avoid are payday loans, transferring the debt to another credit card, or cashing in your Registered Retirement Savings Plan (RRSP).

With interest rates on mortgages near record lows, it’s a much better idea to consolidate debt by obtaining a refinance mortgage. By taping the equity you’ve built up in your home, you will end up with a single monthly payment with a significantly lower interest rate. This will allow you to pay off your credit card debt much more quickly, free up hundreds of dollars in cash flow each month, and save thousands in unnecessary interest payments.

Advantages of Refinancing a Mortgage to Pay off Debt

There are a number of advantages to refinancing a mortgage to pay off your high-interest credit card and even car loan debt.

Lower Fixed-Interest Rates

The interest rates on a refinanced mortgage will be lower than the interest you pay monthly on a credit card. While refinancing a mortgage to pay down debt means you will owe more on your mortgage, because of thelower interest rates, you will also free up cash—which you can put down on the mortgage to help pay off your mortgage more quickly and build up additional equity.

Single Monthly Payment

Not only does refinancing a mortgage to consolidate credit card debt simplify your finances by moving to one easy, monthly payment, it also leaves you with just one loan at a lower interest rate.

Improved Credit Score

Even if your credit is bruised, paying off your high-interest debts when you refinance a mortgage can actuallyimprove your credit rating. That’s because Canada’s credit bureaus see payment in full as a sign that you are good at handling credit card debt.

An Example of Refinancing to Consolidate Debt

Refinancing a mortgage to pay down credit card debt will mean that your mortgage is a little larger, but it’s better to pay a lower interest fee over the long-run than a high-interest fee for an indeterminate amount of time.

Before
Monthly payment on $245,000 mortgage: $1,650
Monthly payment on $15,000 credit card debt: $500.00
Total monthly payment: $2,150

After
Monthly payment on $270,000 mortgage (debts + early payout penalty): $1,740
Total monthly payment: $1,740

That’s $410.00 more in your pocket each month. How you use that extra money is up to you. You can make an extra payment on your mortgage, which could reduce your amortization period by a number of years. Or you could put that money into an RRSP or RESP which also means additional tax benefits. Or you could stow it away into an emergency fund.

Tips to Refinance a Debt Consolidation Mortgage

If you want to refinance your mortgage to consolidate credit card debt, make sure you do it right. That means doing research on your personal finances, reviewing your spending habits, and talking through the options with an independent, licensed, mortgage expert. Below are some top tips to consider when consolidating debt with a mortgage refinancer:

• Review your mortgage and determine the advantages and disadvantages
• Calculate fees associated with the loans you are considering
• Compare interest rates; will they be fixed or variable?
• Should you consolidate all of your debts or loans into the mortgage refinance?
• How long will you be in the home you are taking a refinancing loan on?
• Do the long-term savings outweigh the initial outlay?

Canadalend.com, Helping Canadians Refinance and Save

If you’re finances are stretched because of credit card and other consumer debt, a debt consolidation refinance loan might be the best road to take. That being said, a debt consolidation refinance loan is a big commitment and something that you need to consider carefully. If you’re looking to roll your credit card debt into a new mortgage, contact a licensed mortgage professional at Canadalend.com.

The independent agents at Canadalend.com will help evaluate your financial situation and consider all of your options. To find out if refinancing or breaking your mortgage to pay off credit card debt is right for you, contact Canadalend.com today.

Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Source:

1.“Pigged out on debt? Remember you have to pay for it, RBC warns,” The Globe and Mail, March 3, 2017; http://www.theglobeandmail.com/report-on-business/top-business-stories/pigged-out-on-debt-remember-you-have-to-pay-for-it-rbc-warns/article34198451/.

Toronto is a North American metropolis that has started to get its due with the likes of New York, Chicago and Paris in the last decade or so. It’s a been a slow ascend to global recognition and the current housing market is a glimpse into the value of Toronto both for businesses and residents.

What Defines a Housing Bubble?

A housing bubble is usually defined by a noticeable uptick in housing prices based on demand but fueled by speculation. The bubble grows as demand increases but as the demand is met by supply the bubble has the potential to burst. Much of this is artificial. The demand was never real and more of a miscalculation by buyers.

Why Toronto’s Market isn’t a Bubble

The bubble that so many people and pundits have warned against is probably just Toronto catching up to other major cities. The speed and craziness of it all makes it feel dangerously like a bubble, but it’s on par with what other major cities have experienced.

As Canada’s foremost job creator, Toronto constantly attracts newcomers from all over the world. Every year new industries and companies open or expand in Toronto and this brings waves of people. People need a place to live which fuels the housing market. It’s hard to fathom this changing any time soon.

Toronto’s Real Estate Market is a Great Investment

There are few safe investments in the world. Most markets and industries are mired with variables that can drop or drive value. That’s the reality that investors face. The Toronto real estate market offers a safer bet since it has provided relative returns year over year for a while now. Even the condo market has defied expectations and grown with more growth predicted on the horizon.

The term “bubble” gets thrown around a lot and if one honestly looks at Toronto Real Estate and how the city is expanding, it feels like a genuine investment opportunity. There might be dips here and there but it doesn’t have the signs of bursting.

There can be a lot of confusion about home equity loans, its benefits and why one should consider it. A home equity loan is simply a type of loan that allows a borrower to use the equity of their home as collateral.

There are some Good Reasons for a Home Equity Loan

It comes down to responsible borrowing but for those in a serious pinch, this type of loan makes a lot of sense. In certain cases, and used properly and strategically, it can even provide a return.

This is a Great way to Tackle Home Improvement Projects

A home equity loan to improve your home is smart if you’ve done your homework and the renovations improve or fix an aspect of your home. Renovations can be pricy and most cannot go out of pocket for them. This is one of the main reasons that this type of loan exists and is worth considering.

If your home has increased in value, then you’ll have even more equity to borrow against in the future.

A Home Equity Loan can give you a Pool of Cash for Investing

Investing is an acceptable but less popular reason to apply for a home equity loan. You can borrow against the equity of your home at a low rate and then use that money to invest. Obviously, this is only recommended for those with experience, knowledge and a proven track record.

Paying for an Education

Many people struggle to pay for their education or for their children’s education. Even in Canada, where it is subsidized, it can be daunting. A home equity loan can help ease that burden, and while there are risks associated, it can pay off in the long term.

A Medical Emergency could Require a Quick Cash Infusion

As opposed to other loans and line of credits, a home equity loan to deal with a medical emergency is justified. It is also a much better idea to apply for this kind of loan than putting these types of expenses on a credit card.

And that brings us to Credit Card and its Debt

Borrowing against the equity of your home to pay off credit cards is never advisable. It is not considered a cure for consumer debt, especially considering that credit card debt is unsecured.

There are a lot of strong reasons to borrow against the equity built up in your home, and the best advice is to speak with the trusted professional.