New Year’s Resolution: Debt Consolidation!

By

It’s that time of year: the holidays are over, you’re back to work, and your credit cards are maxed out with post-Christmas debt. If you’re wondering how to avoid paying that hefty interest charge that usually comes with carrying a balance, we have a potential solution for you! If you currently have a mortgage on your home, and have equity in the property, debt consolidation via refinancing your mortgage could be what you’ve been looking for.

Let’s take a look at two scenarios. First, we have John Doe, who has a mortgage, carries a balance on his credit cards, and has a line of credit. His monthly payments look like this:


Amount


Monthly Payment


Mortgage


$200,000.00


$1,278.42*


Credit cards @ 18%

Unsecured line of credit @ Prime + 2%


$20,000.00

$10,000.00


$600.00**

$300.00**


Total of Monthly Payments


$2,178.42


Next, let’s look at Jane Smith. She, like John, has a mortgage, but has consolidated her credit card debt and line of credit into her mortgage. Her monthly payments look like this:


Amount


Monthly Payment


Mortgage


$230,000.00


$1,470.19*


Total of Monthly Payments


$1,470,19


Note that Jane has the same amount of debt as John, but her monthly payments are a whopping $708.23 less than John’s. Chances are, if you consolidate your debt in the same way that Jane has, you’ll also have lower monthly debt payments!

A common argument is that sure, monthly payments will be lower, but that the debt would take longer to pay back. While this is true, the amount of interest saved through consolidation is enough of an advantage in itself to outweigh the disadvantage of paying the debt over a longer period of time. That being said, consolidating your debt into your mortgage does not stop you from making extra payments and paying the “credit card, etc. debt” that has been integrated into your mortgage down sooner.

You could also take your debt consolidation a step further, and do what is called the Smith Manoeuvre. At the same time you consolidate your debt, you can also obtain a Home Equity Line of Credit which can be used to finance investments, while getting a tax write-off. Not only will your monthly payments be lower, but you will also be building an investment portfolio, which contributes greatly to your future financial well-being.

If you have a mortgage, and some debt you’d like to consolidate, please contact First Foundation to explore the refinancing and consolidation options available to you. First Foundation can also help you obtain a mortgage pre-approval or approval if you’re purchasing a home. In addition to providing mortgage services, First Foundation can also put you in touch with quality financial planners that can help you with your financial planning and life insurance needs.

*Based on a 25 year Amortization at 5.99%

**Based on minimum payments of 3% of balance monthly