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  • Writer's pictureBrandon Nishi

Unlocking Financial Freedom: The Ultimate Guide to Debt Consolidation through Refinancing

Debt consolidation is a financial strategy that allows individuals to simplify their debt management by combining multiple debts into a single, more manageable loan or repayment plan. This process is often pursued to lower interest rates, reduce monthly payments, and make it easier to keep track of one's financial obligations. Debt consolidation can be a helpful tool for those struggling with high-interest debts or multiple creditors, as it can potentially save money and reduce the stress associated with managing various financial obligations.


Step 1: Calculate Your Home Equity

If you own your home, one way to consolidate debt is by refinancing your home. The first step is to calculate how much equity you have in your property. Here's an example:

  • You originally bought your home for $400,000 in 2020.

  • You have a mortgage balance of $250,000.

  • Your home is now evaluated at $600,000 in 2023.

  • Most banks allow you to use 80% of the evaluated amount for refinancing:

  • $600,000 x 80% = $480,000 can be used.

  • This means you have $230,000 of usable equity.

Step 2: Compare High-Interest Debt vs. Refinancing

Refinancing your home can be a powerful financial move if done correctly. Instead of paying high interest rates (15-25%) on your credit card debt, you can consolidate it into one low-interest payment. Here's an example comparing your high-interest debt to refinancing:


Example:

Liability

Balance

​Interest

​Minimum Payments

​Credit Card

​$25,000

24.99%

$520.63/month

Line of Credit

$21,000

​14.49%

​$253.58/month

Personal Loans

$17,000

9.99%

​$141.53/month

​Total Monthly

​$63,000

​$915.74/month

Mortgage:

  • New Mortgage Needed: $63,000

  • Interest Rate: 5.49%

  • Amortization: 30 Years

  • Term: 5 years

  • Monthly Payments: $354.88/month *This is not including the current mortgage details


In this scenario, a few key points to note are:

  • Unsecured, high-interest debt results in interest-only payments, not reducing the principal balance.

  • The mortgage, despite being spread over a 30-year amortization, has a much more manageable monthly payment of $354.88 compared to the combined monthly payments of $915.74 for the high-interest debts.

  • Having additional cash flow at the end of the month allows for the option of making lump sum payments to pay off the mortgage faster.

Step 3: Consideration and Next Steps

While refinancing may seem like an attractive option, there are several factors to consider before committing to it:

  • What fees will you have to pay for refinancing (e.g., lawyer fees, appraisal, mortgage payout penalty)?

  • Do you have enough equity in your property to qualify for refinancing?

  • Can you qualify for a new mortgage, and can you comfortably manage the monthly payments on the new mortgage?

Refinancing is a viable option for many homeowners, but there are also alternative solutions, such as a second mortgage or consultation with a licensed insolvency trustee. It's advisable to explore your options and seek professional advice before making a decision. Consultations are often free, so consider reaching out for guidance.


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