Taking out some equity from your home to pay off higher interest debts can make sense!
80% is the magic number when looking to refinance.
When seeking a refinance, the government will only allow you to pull out equity up to 80% of the value of the home.
As an example:
Current mortgage balance: $300,000
Current value of home: $400,000
80% of $400,000: $320,000
Amount of equity that can be withdrawn: $320,000 - $300,000 = $20,000
Here is an example of the math:
BEFORE REFINANCING:
$300,000 mortgage, 3% interest rate, 25 year amortization
Payments: $1419.74 per month
Over 5 years:
Principal paid: $41,607.99
Interest paid: $43,576.41
$20,000 credit card debt at 20% interest.
Making the minimum payment over 5 years: $20,000 interest paid.
Monthly interest payment: $333.00 (Not taking into account minimum principal that would be paid - just for illustration)
Total Payments:
$1419.74 + $333 = $1753.07 per month.
Over 5 years:
Principal paid: $41,607.99
Interest paid: $63,576.41
AFTER REFINANCING
Example #1
$320,000 mortgage, 3% interest, 25 year amortization
Payments: $1,514.39 per month
Over 5 years:
Principal Paid: $46,481.52
Interest Paid: $44,381.88
By combining the $20,000 in credit card debt into the mortgage, this person over the next 5 years would save $19,194.53 in interest and save $14,320.80 in payments.
Example #2
In order to pay the credit card down faster, they can reduce the amortization of the new $320,000 mortgage to match the old payment.
$320,000 mortgage, 3% interest, 20 year, 4 month amortization
Payments: $1,750.50 per month
Over 5 years:
Principal Paid: $61,738.13
Interest paid: $43,291.87
By combining the credit cards into the mortgage and keeping the payments the same as they are currently, this person will save $20,284.54 interest over the 5 years and pay an extra $20,130 worth of principal.
Which means after 5 years they have paid the credit cards in full.
This is just a basic example, but it works with all types of unsecured debts. (car loans, lines of credit, personal loans)
If you'd like us to run the math for your specific situation, feel free to reach out to us!
Mark Norman has been one of the top Mortgage Professionals in the St. John's area since 2004. Since earning his Accredited Mortgage Professional (AMP) designation in 2006, Mark has been actively involved in the Canadian Mortgage Industry and has traveled all over Canada and the USA for conferences and professional development seminars, to ensure his clients are always implementing the best mortgage strategies and that they remain far ahead of the average borrower. No need to take his word for it though as many other media outlets have taken notice of his expert advice and have featured his articles in The Globe and Mail, Canadian Real Estate Magazine, Canadian Mortgage Professional magazine, and has been the recipient of the AMP Excellence award from Mortgage Professionals Canada. He is often seen on NTV, CBC News, and CBC Radio, and remians the "go to" voice in the media when changes are made to government mortgage regulations that affect Newfoundland borrowers.
Mark has built a long career on making sure clients get the correct mortgage product. One that's as unique and tailored for their individual situation. One size does not fit all, and his ability to whittle through the hundreds of products from dozens of banks and lenders in Canada means he can find more than just a great rate. (That's the easy part). Most borrowers think about solving today's problem, but it's the long game he redirects their focus on, and this is why his clients save thousands of dollars over bank clients. Mark is acutely aware all the secrets that your bank does NOT want you to know, including how to avoid big mortgage penalties in the future, or how to negotiate a better deal at renewal time. He leaves he leaves nothing on the table for lenders or banks and always makes sure his clients have options, not only today, but down the road when unexpected adjustments/changes need to be made.
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