The debt-to-income ratio is in the headlines again. This time the ratio rose to 167.3% in the fourth quarter of 2016 compared to 166.8% in the third quarter. That means for every dollar of disposable income, consumers owe $1.67. Approximately 63% of that debt is in mortgages.
While this increase worries some policy-makers, studies have shown that consumers have been able to pay their debt relatively easily. Low interest rates have allowed consumers to pay down more of their mortgage principal, with payments split almost evenly between interest and principal in the fourth quarter.
Sometimes is makes sense to search for solutions to pay down the debt. Once such solution is using your mortgage broker at renewal to do a refinance to incorporate the debt. When arranging for the debt consolidation on a refinance, the amount of the mortgage principal is increased to payout the debt. In order to use the equity in your home for debt consolidation, you need to have over 20% equity in your home.
Here is what you need to know. A refinance alters the terms and conditions of your mortgage; specifially you are increasing the amount of your mortgage. Your mortgage payment may or may not increase, depending on a number of factors and you may incur a penalty to break your existing mortgage if your are refinancing midterm. Depending on your current mortgage you could be paying off the refinance debt at a much lower interest rate, which could save you thousands of dollars in interest in the long run.
As with all renewals, it’s always a good idea to review your mortgage with a mortgage broker who can shop the rates for you and get you the best deal, tailored to your particular situation. And if you decide to switch lenders, there are no penalties at renewal time.
If you are thinking you need to refinance to payout some debt, give me a call. Let me do the number crunching for you. Looking forward to hearing from you.