Personal Finance

Is it worth refinancing a mortgage over a longer term to pay off debt?

  • Last Updated:
  • Dec 16th, 2013 9:54 am
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[OP]
Member
Mar 17, 2010
233 posts
14 upvotes
Vancouver

Is it worth refinancing a mortgage over a longer term to pay off debt?

I'm 4.5 years into a 5 year mortgage term (25yr amortization) on my house. I also have accumulated $20k in personal debt (credit card, line of credit) that I really want to pay off. My goal is to sell my house in 2 years and move into something a bit smaller and more affordable.

I'm thinking about re-financing my mortgage on a 2-year fixed term on another 25 year amortization. I ran the rough numbers and this would save me over $500/month in mortgage payments, which I would put directly towards my debt.

Now I understand that in doing this, I'm basically turning back the clock on my amortization, and paying little to nothing on the principal of my house for the next two years. But i'll be paying off debt, which has a relatively high interest rate, and I want to be debt-free, or as close as possible, when I move. I'm hoping the principal that I get out of this house will cover a down payment on the next.

Has anybody done anything like this, and is it a good idea, or is there anything I'm not considering or should watch out for? I'm also going to use one of those 0% balance transfer MBNA credit cards to help get rid of interest payments over the next couple years.


Thanks for any advice you can offer!
5 replies
Banned
User avatar
Feb 15, 2008
26318 posts
3201 upvotes
Calgary
Well if you're turning $20k of debt at 20%, to $20k of debt at 4%, that seems to be a no-brainer.

Personally I wouldn't suggest waiting too long to downsize, especially if that's your goal. 2 years can mean the loss of a lot of equity as the housing downturn accelerates.
TodayHello wrote:
Oct 16th, 2012 9:06 pm
...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
Deal Fanatic
Nov 24, 2013
5683 posts
2296 upvotes
Kingston, ON
Depending on the interest rates on your other debt it can definitely make sense to do.

It sounds like you want to reduce your mortgage payment and put the payment difference to other debt over time. What I'd consider doing is increasing your mortgage principle to pay off the debts, and then structuring your refinance to the payment level you would have wanted to be at on the combined debt. This will maximize your interest savings. There may be some fees involved, and you can only increase the mortgage to 80% Loan-to-Value, but it can be worth it.

Example, I was 4 years into a 25 year amort with 5% down. Between appreciation, biweekly rapid payments, and increased payment amounts, I had a fair bit of equity. I increased the mortgage to 80% LTV on a 21 year amort, meaning I wasn't extending my mortgage at all, and my payment remained less than my old mortgage + debt payments combined.
Deal Addict
User avatar
Jan 2, 2012
3248 posts
1082 upvotes
Toronto
OP you also might want to consider simply selling you home, using the equity to pay off all your debts, and renting for a while. Renting and completely debt free while saving for a new downpayment... may be better that owning but have a mortgage and huge debt hanging over you that will take years to pay off.
Sr. Member
Sep 25, 2006
598 posts
58 upvotes
Ottawa
I suggest renewing your mortgage in the next 6 month at variable (prime -.55) and consolidating your debt into the mortgage. The interest you save from going variable will help reduce your monthly payments to your debt.

Keep the home until you're already to sell so your keep building equity. Just remember to not lock for more than 2years since you plan to sell.

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