A guide to homeowner debt consolidation in Canada: Having bad credit can make it hard for you to take out loans. Fortunately, there are other options for you to choose from. Homeowner debt consolidation is the easiest and fastest way to get out of debt.
So what is debt consolidation, you may be asking? Debt consolidation works by taking out a loan to pay off multiple debts.
By consolidating debt, all of your loan payments get grouped. Therefore, there aren’t any surprise payments due at various times of the month! Keep reading to learn more about your options.
Why Do People Choose to Consolidate Their Loans?
Usually, when you consolidate your loans, the new line of credit has less interest. This makes it easier for people to pay off their debts.
However, like any other loan, the longer it takes to pay off the loan, the more interest builds. Therefore, you should try and make higher monthly payments if possible!
How Does Debt Consolidation Work?
Practically any kind of debt can be consolidated. For example, most of the time, people consolidate school, home, and credit card debts.
You can start this process by applying for a loan through a bank, student loan programs, or a new credit card. However, the best loan for bad credit is a home equity loan or a HELOC.
Home Equity Loan
A home equity loan is a fixed-rate loan. This kind of loan is also considered a second mortgage. This is because the investment in the home works as insurance for the lending institution.
Once your LTV and total home equity have been established, the lender will give you a percentage of your equity. Usually, a lender will set up a payment arrangement covering the interest and set rate.
Lastly, home equity can get you out of a financial crisis. Often, homeowners will also use this line of credit to increase the value of their homes by doing repairs or renovations. However, this can be a risky move, especially if real estate values decline.
How to Calculate Home Equity
Home equity can be calculated by taking the amount of money you owe on your current loan minus the market value of your home. For example, if the market value for your home is $800,00 and you owe $500,000, your home equity is $300,000.
Other factors may affect your total home equity. These factors are usually estimated by doing a loan-to-value ratio.
An LTV is done by dividing the amount of money borrowed for a mortgage by the current estimated value of your home. If you have a higher LTV ratio, then this means your home equity will be less.
A higher LTV also means your monthly interest pages are higher. But, overall, a high LTV will not stop you from acquiring home equity; it will only affect the total amount given!
Pros of Home Equity Loan
Fixed payment can make it easy for you to budget and manage your other bills, for starters. You can also receive a substantial amount of money when compared to other lending institutions.
There are also little restrictions on what you can spend this money on. Some homeowners will invest this money back into their homes. However, you could also invest this money into building a good stock portfolio!
Cons of Home Equity Loan
A home equity loan can be life-changing and improve your finances dramatically. However, if you default on your payments there are consequences!
Most home equity loans come with a lower interest when compared to other unsecured types of loans. However, a home equity loan may have a higher interest rate when compared to a HELOC. Keep reading to learn more about a HELOC!
Home Equity Line of Credit
A Heloc is a little different than a home equity loan. For starters, a Heloc is considered a revolving credit line. This means the homeowner can access a set limit of money whenever they need it.
A Heloc is also a secured line of credit like a home equity loan. This means that if payment defaults, the lender has access to your home.
The interest rates for Heloc’s can sometimes change as well. However, you only pay interest rates on the money you spend.
So you could have a huge line of credit, but only the money you’ve spent gets added interest. Your payments will also vary depending on how much money is owed.
Pros of HELOC
Heloc is a lot more flexible because you can take out as much money as needed and don’t exceed your credit limit. You also have few limitations on where you can spend your money on.
As stated previously, the interest rates change but are only applied to the money that is spent. Overall, a Heloc has lower interest rates than a home equity loan.
Cons of HELOC
Heloc is somewhat similar to a credit card. This means it can be easy to rack up your bill. However, when managed properly, a Heloc is an excellent tool to eliminate debt, repair credit and improve cash flow.
Homeowner Debt Consolidation Made Easy
Having multiple debts from different lenders can make it impossible to keep up with payments. However, homeowner debt consolidation can help you organize payments and to improve your cash flow.