How to Consolidate Debt with Poor Credit?

How to Consolidate Debt with Poor Credit?

We hear the words “consolidated debt” all the time in commercials, radio advertisements, and even in digital marketing ads. There are so many people living with massive mountains of debt to their name and with interest rates growing exponentially each year, it can become difficult to even manage your debt. So before you decide to refinance your home, purchase a rental or investment property, purchase a vehicle, or other large purchase, it is always good practice to check your credit and maintain it. 

Things can show up from years ago that you thought were settled and taken care of. Been divorced? Your ex-spouse may have filed bankruptcy and those creditors don’t care who shows responsibility for the debt in the divorce decree. It is now your debt and your burden to bear. 

Consolidating your debt is a great way to increase your credit score quickly. This is because it shows many past accounts paid in full and just one (usually revolving) credit account on your credit. This is appealing to most lenders when it comes to getting a mortgage. 

So what if you already own a home? We have some great ways to consolidate your debt by leveraging your home and your home equity. 

Take Out a Second Mortgage

 A second mortgage is when you leverage the current equity you have in your home. In other words, if your home is $500,000 and you have already paid $300,000, you have roughly what you paid in equity. Don’t forget to take into consideration the market fluctuations and value in your neighborhood. This will affect how much equity you have as well as the starting interest rate you agreed upon in your first mortgage. 

People typically will take out a second mortgage to pay off other larger debt, purchase something really big (maybe an investment property), or make renovations on their current home. The bank is essentially giving you a second loan on the equity you have in your home and charging you interest on that as well as leveraging your home as collateral. Be sure to decide carefully with this choice because your home could be at risk if you are not responsible enough to pay the second mortgage. 

Home Equity Lines of Credit (HELOCs)

A HELOC is very similar to a home equity loan and a second mortgage in that it’s directly based on the equity you have in your home. The biggest difference is that a home equity loan gives you the entire loan in a lump sum so the interest rate is usually a fixed rate, whereas, a HELOC is a line of credit on the equity you have in your home. This means that it isn’t given to you in a lump sum rather it is taken out as you need it and the interest rate is directly impacted by the amount of debt you hold on the line of credit. 

HELOCs are a safer way to leverage your home equity for debts or renovations to your home. They can also be utilized for adding additions to your home or repairs to your home from emergencies like flooding or smoke damage.

Many people get HELOCs to pay for renovations and additions to their home, student loans, credit card debt consolidation, medical bills, and financial emergencies. Overall, a HELOC is a great way for current homeowners to consolidate their debt. 

Refinancing Your Home

Another option you have to consolidate your debt is refinancing your home. You may be asking yourself how this would even be possible. Typically people refinance their home just to save on the interest rate. What they don’t know, is there is more to the story than that. 

When you refinance your home, you use the equity you already have in your home and the difference of the lower interest rate to pay off other non-mortgage debt. Then you pay your lower mortgage rate. 

Be sure to account for closing costs on the refinance loan, and budget it into the mortgage so you don’t have any out pocket cost on closing. 

Let’s get started now! Contact Brampton Mortgage Broker today!

If you would like to learn more about how you can save money and get out of debt with a consolidation loan, contact me today for a meeting. 

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