Mortgage refinancing is a popular way to get out of debt, but is it the right option for you?

During the ongoing COVID-19 pandemic, you may be looking for ways to reduce your debt load. If you own a home, you can use available equity to pay down your debts. Read on for the pros and cons.

Pros

• Refinancing your mortgage allows you to put debts into one payment.

This can give you more freedom in your budget as you will have a fixed payment on a fixed schedule — so you will know exactly what you owe and when.

This is an effective way to quickly deal with high-interest debt while managing your budget.

• It lets you keep your house (unlike some cases of filing for insolvency).

In some cases, filing for bankruptcy or a consumer proposal puts your assets — like your house — at risk.

With a mortgage refinancing, your home is safe so long as you meet your payments.

• You could save money if you get a lower interest rate.

If you refinance for a lower mortgage rate, you could save money on your monthly mortgage payments if you bought your home at a time when interest rates were higher.

• It doesn’t harm your credit score (at least not immediately).

When you file for bankruptcy or a consumer proposal, your credit score takes an immediate hit and you are left with a low rating for five-to-seven years.

With mortgage refinancing, however, that doesn’t happen. In fact, if you are using the equity to pay off high-interest debts, like credit cards, your credit score could go up!

The caveat here is that if you default on your mortgage or miss a payment, your long-term credit score could still be affected.

Cons

• It could restart your amortization schedule.

If you were five years into a 25-year mortgage term and decided to refinance, your term would reset to 25 years. This means you would be paying your mortgage for an extra five years.

While you would be paying mostly interest for the last five years, it will be longer until you are mortgage-free.

• You might get a higher interest rate.

Depending on when you bought your house, your mortgage rate could actually go up.

• You will have less equity to access later.

By taking out equity now, it may be harder to access later (at least through a refinancing) and you’ll have to wait for it to accumulate again.

• It may not be possible if you’re carrying too much debt.

Like getting a mortgage to begin with, you have to qualify for a refinancing. If you’ve lost your income, your credit score is low, or you’re carrying too much debt, you may not qualify.

(If this is the case, talk to a debt counsellor – they can help you clean up your finances so you can qualify.)

• You may have to pay closing costs.

Mortgage refinancing typically comes with closing costs and other fees. These numbers could affect your decision.

• If you’re breaking your current mortgage term, it might not make financial sense.

Breaking your current term early can come with additional costs.

If mortgage refinancing won’t work for you, there may be another option that does, such as taking out a second mortgage, a home equity line of credit (HELOC), or another debt consolidation method.

Whatever method you choose — refinancing or not — the important thing to keep in mind is that it will work so long as you keep your finances under control. Debt consolidation isn’t an invitation to start buying more. You need to have a plan for how to manage your money after refinancing (or your chosen debt management method) too.

At DebtCare Canada, we can help you do both — explore options to deal with debt and create a plan to stay debt-free for good.

We offer first mortgages, second mortgages, HELOCs, and more.

Contact us today for a free consultation. Call or text 1-888-890-0888 or visit www.debtcare.ca.