A 2008 New Year’s resolution worth considering: get rid of high interest debts.
If you are already a home owner, you will likely have some equity in your home. Using that equity to pay off consumer debts may be an option that will ease some of the stress of paying high interest debts over a long term. Instead of paying your credit card debts at 18 - 20% interest, you may be able to consolidate that debt into your current mortgage and pay it off at less than 6%. Current Debt Position Balance Monthly Payment 1st Mortgage at 5.5 % (amortization 19 years) $220,000.00 $1,549.75 Private 2nd Mortgage at 14% (interest only) $40,000.00 $453.61 Car Loan and Credit Card at (at 18% APR $18,857.00 $915.71 Total Mortgages + Car Loan + Credit Cards
$278,857.00
$2,919.07 New Debt Position Balance Payment New Mortgage at 5.5% (amortization 19 years) R$278,857.00 $1,964.36 2nd Mortgage at 14% (interest only) $0.00 $0.00 Car Loan and Credit Card at (at 18% APR $0.00 $0.00 Total Mortgage + paid Car Loan + paid Credit Cards
$278,857.00
$1,964.36 Total Monthly Saving: $2,919.07 - $1,964.36 = $954.71
RCMHC insurance fees and mortgage cancellation penalties may apply. This example is illustrative only. Interest rates are subject to change. æ APR
Consider above, a recent client with a mortgage balance of $220,000, a second mortgage at $40,000 and other debts totalling $18,857. By consolidating the two mortgages, the car loan and the high interest credit cards, the client was able to reduce monthly payments and save $954.71 per month. It is important to note that for this exercise to bear real financial fruit, this monthly saving should be applied to either an investment or as additional principal payments against the new mortgage. All too often, the additional cash flow is consumed resulting in a similar crisis a few years down the road.
Such a consolidation will not only reduce monthly debt load but will improve and protect your credit rating, a major consideration for any Canadian seeking future loans. Missed or late payments are not the only factors that can reduce your credit rating in the eyes of financial institutions, credit cards and lines of credit that are “maxed out” can have the same negative impact. You should always know, validate and protect your credit rating as much as your SIN number and credit cards. When it comes time to renew your mortgage finance, you will be glad you kept your credit rating in good standing. You can check your credit rating once per year, free of charge.
Just call Equifax at 1-800-465-7166 or go on-line at www.equifax.ca to fill out the form.
This article was written by Elizabeth Blair, a Mortgage Consultant with Mortgage Edge. You can contact Elizabeth eblair@mortgageedge.ca
Elizabeth
