If you own a home and struggle with debt, you may have considered mortgage refinancing.

As we’ve written before, if mortgage refinancing is on your mind, you may want to start the process now, before Canadian interest rates increase any further.

But before you begin you need to make sure that you understand the process and are picking the mortgage refinancing option that is best for you.

Below are some common refinancing options you may be considering.

1. Refinancing First Mortgage

First mortgage refinancing can be a way to assess your monthly mortgage payments and ask if they are still working for your lifestyle. Do you find you’re struggling to make mortgage payments? Or perhaps you have other forms of high-interest debt (credit cards, lines of credit, etc.) and are having trouble repaying those. If you have equity available in your home, then first mortgage refinancing may be for you.

Consider the following scenario:

You have a mortgage for $350,000 with Lender A at an 8% interest rate, and you have $25,000 in high-interest debt. You find that you can get a mortgage of $375,000 from Lender B with a 6% interest rate. You use the $350,000 to pay off Lender A, and the $25,000 to pay off your other debt, and then you repay Lender B over the long-term with a lower interest rate.

But there are downsides to refinancing your first mortgage, too. If you’re breaking your current mortgage in the middle of the term, you might be subject to penalties. Your lender may charge you a prepayment penalty. For fixed mortgage rates this penalty is the greater of three months’ interest or the interest rate differential payment (IRD). For variable mortgage rates this is the equivalent of three months’ interest.

You will also incur legal fees as a lawyer must change the financing on the title.

2. Second Mortgage

A second mortgage is an additional loan taken out on a property that’s already mortgaged. It doesn’t affect your first mortgage, so you won’t be charged for breaking your mortgage early. If you have good credit and more than 20% equity in your home, you may be eligible.

A second mortgage often carries a higher interest rate than a first mortgage, but the interest rate is still lower than other forms of debt you might be paying off, like credit cards, car payments, or unsecured lines of credit.

If you use a second mortgage to consolidate debt and make your payments on time, it could help increase your credit score.

The big downside to a second mortgage is that most lenders will want to know you have good credit and a reliable source of income. A second mortgage is inherently riskier as you’ll now have two mortgages, so a lender will want to make sure you won’t default. And while you won’t be subject to fines for breaking your mortgage early, there may be other fees incurred during the set up.

If you have equity available in your home and a plan to pay for your second mortgage debt, it could be a good option.

How to Decide What is Right for You

If you have good credit, at least 20% equity available, and a plan to pay off the debt long-term, a second mortgage can be a great option for debt consolidation. But you need to know how you will repay it. If your credit has been harmed because of excessive debt, a second mortgage can help you rebuild it so long as you make your payments on time.

If your mortgage payments are too much, or you have equity available on your current mortgage that you want to access, then refinancing your first mortgage may be the best option. This can be a long-term solution that helps you get out of debt and save more money over time, but it depends on the interest rates you are eligible for.

Both options include fees. A second mortgage includes appraisal fees, legal fees, a lender’s self-insured fees, and mortgage fees, plus interest on the loan. Refinancing your first mortgage includes legal fees and a potential pre-payment fee if you are breaking your mortgage early. Plus, if you change lenders, you may be subject to another fee.

If Your Bank Says No

If you have equity available, but your credit is bruised, you might not be able to get mortgage refinancing or a second mortgage with a prime lender. However, there are many non-mainstream financial institutions that may still lend to you, but you will need a good mortgage broker to get to them.

Deciding what option is best for you comes down to your debt consolidation needs, your credit score, and your available equity. You don’t have to decide alone. DebtCare’s financial experts can help you take stock of your situation to determine what debt management method is best for you, or if there’s another option that may be even better.

DebtCare offers one of the most competitive financial programs to help people no matter their credit or income. Bad credit? No problem. Self-employed? No problem. We can assist with first mortgages, second mortgages, home equity lines of credit, and more.

Call us today for a free consultation: 1-888-890-0888.