Can refinancing my home solve my debt issues?

This is a question frequently asked concerning mortgage financing…

I have credit card debt. Could my house be the solution to my debt issues?

The answer is YES, if you have the necessary equity to refinance your property. The principle is simple: calculate 80% of the market value of your home and then subtract the current mortgage. Is there any equity left?  Is it enough to pay off your debts?

Here is a concrete example:

• Townhouse purchased several years ago for $250,000
• Current market or resale value: $300,000
• Mortgage balance: $200,000
• Refinancing the mortgage at 80% of the $300,000 market value =  $240,000
• $240,000 – $200,000 (mortgage balance) = $40,000 (the sum available after refinancing the mortgage)

To sum it all up: by refinancing your townhouse to 80% of its market value, your new mortgage will be $240,000, which leaves you with $40,000 to pay off your credit card debts. The money could also be used for renovations, RRSPs, or the purchase of an income property.

You could also separate the additional $40,000 from the rest of your mortgage and amortize it over a shorter term than the original 25-year term.  This way it will not take you 25 years to pay off  your debts.

Finally, if refinancing your property allows you to pay off  high-interest debts and restructure your finances, then it makes perfect sense to do it. Just make sure you do not fall back into the same debt patterns, because it will not be easy to repeat this process several times. Every month we reduce the pressure of our clients’ debt burden, and our hope is that, you, like them, will be able to benefit from a better financial situation.

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