Talking more about your mortgage questions!
In this video, Chris Molder, a Toronto mortgage broker, sits down to answer a question about consolidating your debt.
When is the right time to refinance your mortgage to consolidate debt?
I talk to a lot of people about debt and how to manage it. One of the greatest tragedies is thinking you can manage it all hoping tomorrow will be better. If you’re not careful, instead of climbing out debt you’ll sink deeper and deeper in the hole.
In this video I talk about how to understand when is the right time to face reality and consolidate your debt using home equity. The sooner you face reality the better and more reasonable the options are.
Delaying a debt consolidation can be a killer because once your credit score drops below a certain threshold the only options are more expensive “B” type lenders.
Did you know that one of the driving influences on your credit score is how much of your available credit you are using? If you’re effectively maxed out all the time, your score will drop.
Don’t feel like watching? Find the full transcript below!
Are you worried about debt and when you should refinance your mortgage? This post is for you!
When is the right time to refinance?
Chris: [00:00:00] Question is simple – how do we know when is the right time to refinance your mortgage to consolidate mounting debt? In practice, though, it’s a little bit more challenging. So let’s dive a little bit deeper to answer that question.
Chris: [00:00:13] The answer really lies in understanding your cash flow. And it’s pretty simple. It’s time to refinance your mortgage if your monthly expenses are greater than your monthly income. So how do we come up with establishing your monthly expenses? It’s your monthly mortgage payment, plus your property taxes and then your monthly bills. That could be groceries, utility bills, insurance, whatever it takes to get you through the month. And then you have to look at your debt.
It starts with your cash flow
Chris: [00:00:44] In reality, you should be paying back about 3% of the outstanding balances on your credit cards and lines of credit. So if you have $20,000 in debt, three percent would be a $600 per month payment towards the principal. If the sum of all of your expenses is greater than your household income, then it’s time to refinance. You’ve got to face the music, guys.
There’s no polite way of putting it. You’re effectively broke. Now, here’s where the biggest pitfall is because it might be tempting to take a look at your cash flow and say, well, you know, I think things are going to get better in the future. One day when one day if things will improve. And so there’s a tendency to try and hold on. That’s super dangerous because we’ve seen it time and time again.
Chris: [00:01:35] Your one life crisis away from being underwater. You’re one car breakdown from being not able to afford those payments anymore. So if you are on the line or close, I can’t stress enough how important it is to consider that refinance. Let’s take a look at the solution of refinancing and how it helps households that are stressed with cash flow. Here’s a real-life example I want to show you.
Taking control of your financial future
Chris: [00:02:01] Consider the following borrower. They have a$350,00 mortgage balance with an $1850 per month mortgage payment. They’ve racked up about $40,000 in credit card debt, so 3% of $40,000 is $1200 per month. That should be paid to eliminate that debt. They have a car loan, $25,000, costing them about $360 a month. So when you add it all up, they have about $415,000 in total debt and $3412 per month in cash flow. And it’s stressing them out so we can consolidate everything together in a new mortgage of $415,000. And now the monthly payments improve dramatically. Of course, the monthly mortgage payment depends on the amortization period.
Chris: [00:02:56] So if you want to have an aggressive repayment, it’s about $2000 per month. A 25-year amortization would be $1718 month, and a 30-year amortization reduces the payments to about $1500 per month.
Chris: [00:03:13] As you can see, we’ve taken an impossible situation for a borrower to a possible situation, reducing their monthly payments by $1920, improving the cash flow. Do you think that’s going to make a difference in their life? Absolutely.
Chris: [00:03:29] Is this the type of relief that you need in your life, looking at your own circumstances? Well, if it is, I have a word of caution for you. You do not want to delay refinancing because if you hold on, your credit score is being negatively affected by the amount of debt that you’re carrying. And if you miss one payment, your score will drop below the minimum requirement of the lender, meaning that that door, that window of opportunity to refinance closes on you. And then we have to deal with some very expensive solutions and fixing of the problem, which gets way out of hand. So if you think you need to do a refinance, do not delay.
Refinancing gives you options
Chris: [00:04:13] One more word about refinancing that I want to share with you. If you are listening to this and you think, well, that’s all fine and dandy, Chris, but my credit score sucks already. The damage has been done. I have minimal income. No lender is going to touch me. Well, don’t worry. There are still options. We can set up what’s called a home equity loan, which will give you the financing you need to pay off that high-interest debt and start to fix some of those interest problems.
Chris: [00:04:45] My name is Chris Moulder. I’m a Toronto based mortgage broker. If you think you need to refinance or explore any of these options, I’m just a phone call or an email away. Don’t hesitate to call. Bye for now.
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