An accumulation of debt on credit cards, personal loans and other forms of credit at high interest rates can quickly outbalance a budget. The minimum monthly payments are getting heavier and the interest paid is huge. We just do not see the end!
Why refinance your property?
Refinancing your property to consolidate your debts may seem like an interesting avenue at first sight. The net worth of one’s property (the market value minus the balance of the mortgage) is used to repay debts and reduce the interest rate and monthly payments.
For example, if you have $ 30,000 debt on your credit cards at a 20% annual interest rate, if you only make the minimum payments, it will take you a little over 32 years to pay everything back and you paid $ 37,240 in interest .
On the other hand, if you consolidate your debts with a 25-year mortgage at 5% , you will only have to make monthly payments of $ 175 and you will have paid $ 22,500 in interest .
In this scenario, you save $ 14,740 in interest . Not bad at all !
In theory, mortgage debt consolidation can save you significant amounts of interest and put your budget in the green.
Despite the fact that previous calculations hold water and that debt consolidation actually allows you to reduce interest paid, a caveat on two crucial issues is more than necessary.
High interest payments
The first issue is that despite a reduction in interest paid, they are still very high. In the consolidation scenario, we are talking about $ 22,500 in interest on a debt of $ 30,000. It’s enormous !
The pair of shoes at $ 100, you will have paid $ 175 in the end. The $ 1,000 TV will have cost you $ 1,750. So on … The ideal is to find solutions to pay a lot less interest.
The simplest solution is to review your budget, reduce unnecessary expenses and maximize the repayment of your debts. In this scenario, if you manage to spend $ 1,000 a month repaying your debts of $ 30,000, you will have paid back everything in 3 years and 6 months and you only paid $ 11,935 in interest. Already much better!
Falling back into debt
When you decide to settle your debt problems for good, the most important thing is to identify the cause of the problem. You need to understand the reasons that led you to your debt problems and make sure that the situation will not happen again. You may need to change certain financial habits.
If you do not tackle the problem directly at the source, consolidating your debts with a new mortgage simply means that the problem is likely to get worse. It is quite possible that debt consolidation will impoverish you: you will have less equity in your home and you will start to get into debt on your credit cards.
Basically, when you do a debt consolidation you have to cut your credit cards or ask that the limit be reduced to a minimum: $ 1,000 or $ 500 if possible.
Find a permanent solution
If you are looking for a solution to free yourself of your debts permanently and without paying a fortune in interest, we invite you to meet one of our professionals.
The first meeting is free of charge, without obligation and completely confidential. Together, we look at the different scenarios available to you and we will guide you to the best solution.
Bankruptcy is not the only solution! There are several alternatives.