Mortgage issues make me nervous

June 2, 2006 3:39 PM

Re-Mortgaging: Advice/Warnings for a Canadian?

I currently own a condo in Calgary, Alberta. Due to Calgary's current real-estate boom and the particular awesomeness of my condo, I have every reason to assume that it is worth signifigantly more than I paid for it 1 year ago - I'd say that a $50-75,000 increase in value would be a conservative estimate.

My current mortage is a 5-year fixed-rate (4.5%) from a major national bank (TD).

My gf (co-owner) and I have approx $8000 in total debt, all at much higher interest rates. We don't really have any spare income month-to-month - every dollar goes to household bills, paying down debt and some meager savings. We want some sort of debt-consolidation solution to take advantage of a lower interest rate (and reduced monthly payments if possible) and we'd also like to spend some money in the home, on some light renovations, painting and appliance upgrades.

I've gotten a lot of recommendations that I re-mortgage the condo to "unlock equity" and get my hands on some cash, but while everyone seems keen to recommend this, no one I know personally has ever done so, and I'm really unclear on how the process would work.

This is how I think it works: I get a 2nd mortgage for an amount closer to the current value of my home. I use the proceeds from that to pay off my current mortgage, and the difference is money that I can use for other things.

Is this correct? Have you done it? What's the catch? Aside from the fact that I'll wind up with a larger mortgage, what future concerns might this create? Would the 2nd mortgage have to be from a different lender? Do I need to have my condo appraised before proceeding?

There's a lot on info on the 'net, and I've tried to process what I've found, but I'd really appreciate some real-world perspective and advice on things.

posted by chudmonkey to work & money (11 comments total)

Why don't you instead apply for a line of credit and use that to pay off the debt? Then you won't be paying it back over 25 years.
posted by acoutu at 4:04 PM on June 2, 2006

I don't know why you don't just talk to TD bank and discuss refinancing the mortgage. Their current rates for a 5-year fixed mortgage are certainly higher than 4.5%. It seems to me that they'd be only to happy to renegotiate for a highr rate than they're getting now, and at mimimal cost to you.
posted by Neiltupper at 4:16 PM on June 2, 2006

Usually "remortgaging" means getting a better mortgage after interest rates have dropped. You arrange to get a new mortgage at the new, lower interest rate, and pay off your existing mortgage, usually with some penalties specified in your mortgage agreement.

That doesn't apply here, since you've got a rate which is already lower than TD's current 5-year rate (6.75%)--rates have been rising. So it doesn't make any sense to get a new mortgage to replace your existing one--it'd be more expensive.

If you want to reduce the interest rate you're paying on your other debts, acoutu's suggestion of getting a line of credit makes more sense.

PS. Are you still planning to scan the Wach? (I posted some crappy digital photos.)
posted by russilwvong at 4:23 PM on June 2, 2006

Neiltupper: if their cash flow is already tight, I'm not sure they'd want to start paying a higher interest rate!
posted by russilwvong at 4:24 PM on June 2, 2006

I don't know, acouto, why don't I? Would you care to explain your "suggestion" any further?
posted by chudmonkey at 4:51 PM on June 2, 2006

If anyone would care to recommend other means of acheiving my goals as stated in my question, I'm very agreeable to that - but please provide some context as well. I don't know any more about "refinancing" or "lines of credit" than I do about my original topic.
posted by chudmonkey at 5:05 PM on June 2, 2006

IANAHO --
From my loose understanding of the proposition, you want to relieve some credit cart debt at probably 12-15%+.

Because you own a home or residence you likely have equity, or value based on your prior payments on the principle of the home.

Because you have this equity you can use it at security for a line of credit against the home. Lines of credit backed by tangible goods, a home, cash deposits, monkeys in a barrel, etc, generally offer a lower interest rate than unsecured forms of credit...credit cards.

Now, you probably don't want to refinance because you currently have an interest rate that is lower than the market rate, in other words refinancing now would subject you to a higher interest rate on your mortgage at the expense of possibly paying off some high interest credit card debt. Long term it costs you more.

So, talk to your bank about an equity line of credit against your home, you'd use that line of credit to pay off the high interest credit card debt, CUT UP THE CREDIT CARDS, and pay back the line of credit.

This can be a dangerous thing for undisciplined folks, I have known people to endeavor to retire high interest credit card debt with an equity line against their home and immediatelly after paying off the debt they proceeded to rack it up again.

Before you do anything however, if you're really worried about it, cut up the credit cards, figure out which one has the highest interest rate, pay the minimum on the other cards and pay off the highest interest rate card with as much as you can possibly afford a month, proceed down the line.

It's important to rember that your home is not something to be trfled with, there are several websites out there that can provide you with the basics of what you need to know, you can also talk to your bank about it, they can help you figure out a plan to retire your high interest debt.
posted by iamabot at 5:46 PM on June 2, 2006

In the U.S. this is called a "second mortgage". Let's say you have a property worth $500K and a $300K mortgage. In theory, anyone should be willing to make you a secured loan of up to $200K, secured by an interest in the property, just like the first mortgage.

As noted above, you can also get home equity lines of credit. I would be hesitant about refinancing - getting rid of - the first mortgage, since you'd likely be refinancing that lump of debt at a higher rate than it is currently.

While getting rid of credit card debt is a laudable goal, do be sure you aren't making things worse. Go into a bank, or more than one bank, talk to them, see what they can do for you, don't sign anything immediately, lay it all out, calculate how much it will cost. Consider that if you don't have any leftover income right now, and you [remove credit card debt] while you [add mortgage debt + mortgage fees], you may not end up any better off at all. Better, perhaps, to work really hard at decreasing some other expenses and paying off that $8K in some other way.
posted by jellicle at 7:54 PM on June 2, 2006

Actually, I wasn't necessarily suggesting a line of credit against the home. Iamabot has pointed out some of the risks of taking out a line of credit against your home equity. If you think there's a risk you'll run up the debt, have trouble paying it back or have to sell your home in the event of a drop in real estate prices, you wouldn't want to do that. (However, you might be safe if you are disciplined and it's only $8k.) You could ask your bank about an unsecured line of credit or loan for $8k. This will be a little higher than a loan/line against your home, but you won't be putting your home at risk if you end up missing payments or if real estate values fall.

If you consolidate your credit card debt into your mortgage, you will get a higher interest rate, but you're going to be paying off the $8,000 for 25 years. You would actually be better off paying down the $8,000 at a higher rate over 5 years, depending on the rate. But you should really seek to get rid of the credit card debt (even via a loan) because most credit card companies charge you interest on the original amount, not the remaining balance. For example, if you originally charged $12,000 and now owe $8,000, you may actually still be paying interest on the $12,000. They may also have taken away your grace period for interest, meaning anything you now charge to the card incurs interest immediately.

Call your credit card companies. Ask for a lower rate. Then call your bank and see about a line of credit or a loan so you can wipe out that debt.

Get a big coffee tin and fill it with water. Put it in the freezer for 2 hours. Then drop one credit card in it and leave it in the freezer. Do this for each credit card. That way, you still have your cards for emergencies and special purchases like plane tickets, but you'll have to plan for it in advance. (You can't microwave metal!)
posted by acoutu at 8:02 PM on June 2, 2006

From the perspective of someone who has a home in Alberta and banks with TD, perhaps I can offer some suggestions:

1. Get a personal line of credit. The rate you get will depend on your credit and income, and will fluctuate with prime. You're probably looking at 8 - 9% right now. Your payments may be interest only, or they may be interest + principle every month. The advantage to a personal line of credit is that you can take it with you when you move or sell your home. A disadvantage is the high interest rate.

2. Get a home-equity line of credit. The bank will ask you questions about your income, expenses, any debt that you have that is not through them, and if your property has any liens or encumbrances on it besides their mortgage. Then they will send someone out to assess your property. Since you have a condo, they may want to have copies of your condo documents, to see whether you are likely to have an assessment levied and what the history of the building is. Based on the info you gave them and the assessed value of your place, they will offer you x number of dollars. Usually that amount is equal to (75% of your home's value) - (the amount of your first mortgage). Home-equity lines of credit generally have lower interest rates, and you can probably get between 4.5 - 5.5%. As an aside, the bank is generally conservative in its estimate, so will not necessarily value your place at what the neighbour's sold for. Just something to keep in mind.

3. Ask your mortgage person about a "blended" mortgage. You may be able to add on to your existing mortgage, rather than getting a brand-new mortgage. (TD told us that we could do this). So, if you have a mortgage of 100k at 4.5%, and want an extra 30k, they will add the 30k on at say 6.5%, do some fancy math and give you a new rate and payment.

For what it's worth, I have done the #1 & 2 through TD, and they were very helpful, and the process was relatively painless. I hope this helps.
posted by meringue at 9:24 PM on June 2, 2006

Something I forgot to mention: don't get any kind of second mortgage through lenders that send you fliers. Instaloans, Aaron Acceptance, Ditech, whatever. I phoned some of these places a couple of years ago to find out their terms, and basically, you'd be better off keeping your debt on your credit cards. If you get a second mortgage and miss some payments, they can go after your house very quickly. Don't risk it.
posted by meringue at 9:37 PM on June 2, 2006