Homeowners with home equity – you’ve got options, we can help.
As the housing market is booming, you may have recently noticed a rise in your home’s value. Generally, an increase in home equity will see a decrease in the number of people filing bankruptcy. However, with many homeowners leveraging the equity in their homes for renovations or debt consolidation, more equity doesn’t necessarily mean your debt problem is solved.
Despite the risks of over-extending credit, the amount of debt carried by homeowners remains high. We ask the question, even though a second mortgage may save you from bankruptcy does it really help you become debt free?
Homeowners and Credit
It’s common for a homeowner to be granted more credit than a person who doesn’t own a property. Lenders like to see assets and owning property is good for your loan application. You’re more likely to be approved for additional credit if you have assets and home equity is considered a major asset.
Access to additional credit doesn’t always mean you should accept it. Homeowners should be working towards paying off their mortgage and building more equity. Additional mortgages (registered after your primary mortgage) may also have high interest rates if your credit score isn’t great.
Consolidating Your Debt With Home Equity
If you have equity in your home you may have already considered taking a loan against your property either as a refinance to your mortgage or as a second secured loan against your home.
Depending on your credit history, if you have explored this option you may have also discovered that the interest rates you’re being offered are not what you would have hoped for.
If you’re not getting the best interest rates it may be time to review additional options and compare the overall cost.
Filing a Consumer Proposal for Full Repayment and Fees
To understand how a proposal works for someone with a lot of home equity it’s important to understand how home equity is treated in a bankruptcy. In a bankruptcy your home equity “belongs” to your creditors. A proposal offer must be better than what your creditors would receive if you were bankrupt. In a bankruptcy we calculate your net home equity (the “cash out” value if your home were sold, mortgage, lawyers, taxes and realtors paid). We use the final amount you would receive if your house was sold in today’s market. We subtract all closing costs and compare the total to your total debts. In a proposal, equity in your home is often factored into the offer that you make.
If your home equity is equal to or greater than what you owe, a proposal will focus on repaying your debt in full over a maximum of 5 years with no interest. A proposal is better without interest, but you will pay fees and expenses. If you have more equity than debt a proposal can be better because the interest you might pay on a second mortgage or secured loan against your equity could be high. Your proposal will include the fees and expenses of your Licensed Insolvency Trustee. The fees and expenses an LIT charges are strictly monitored by the Office of the Superintendent of Bankruptcy. Keep in mind the cost of ongoing interest should you pay off debt by refinancing your home. Make sure that you compare the cost of borrowing more money versus the cost of a Trustee’s fees in a consumer proposal.
The Risk of Consolidation
Consolidating your unsecured debt and leaving your mortgage alone is also an option. However, be careful when borrowing against home equity. Borrowing at an inexpensive mortgage rate to repay your expensive credit card interest and balances isn’t a plan with longevity. Remember – whatever you borrow against your home will add to your monthly expenses. If you add too much to your monthly expenses, you may find it difficult to meet your obligations.
Real Estate Prices Will Fluctuate
Remember that real estate prices will go up and down. You should consider fluctuating property values while making your decision. Speaking with a realtor and asking for an opinion of your home’s current value is recommended. Your LIT will want to know your current mortgage balance as well as the current estimated value of your property.
To speak with an LIT about your debt and home equity, please call 310-4321 or visit www.spergel.ca. We can help you compare a consumer proposal with a refinance or second mortgage. Review both options to see which will lead you to debt freedom in the least amount of time.