November 29, 2007, 8:00 am

Restructuring My Debts Through My Property Part 2

by: The Financial Blogger    Category: Pay off your Debts,Project $1500
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Yesterday, I presented my net worth situation. Now that I feel completely naked (financially at least), I will explain what I did and why I did. When you are using your property to refinance your debts, two major things will happen. The first one is that you will decrease your monthly payments as you are amortizing your other debts on a longer period. The second is that you will end-up paying more interest at the end of the line.
walking house
It’s all a matter of lifestyle VS interest paid after 30 years.You have to make a decision in regards to this manner. I picked the lifestyle 😉

The process

Consolidating your debts through your property is fairly easy. The first thing to do is to meet with your banker to know if you qualify of not for a bigger amount. As you are already owing this amounts in debts, chances are that the bank will grant the increase on your exiting mortgage conditional of paying most of your debts. By doing so, you will take debts that are usually set over 5 years or less and amortize them over 25 years. Your monthly payments could decrease significantly depending on the amount of debt outstanding.

In my case, the bank requested a recent appraisal of my property as I was requesting 80% of the value as a HELOC. The appraiser came and did the report. I was a bit disappointed with the value we got (I was expecting about 5-7K more) but it was more than enough to do my plan. In only one year and without any modification to my property, it gained 4,5%. My house is now at 275K, making my net worth jumps a little bit over 39K. It is even better considering that I paid 255K last year (even though the appraisal showed 263K). Therefore, I made 7,8% on my house this year.

But the most important part is that I was able to increase my HELOC from 192K to 220 and liberate an additional 28K from the equity in my house. To my opinion, the equity lying in your house is the equivalent of pilling up money in a safe in your basement. You earn no interest and you can’t do anything with it. I think you are better off using the maximum equity from your house for other project.

With this 28K, I will do two things. The first one is that I will pay off my heavy 25K loan at the bank with a monthly payment of $650. When I contracted this loan, it was for 32K and I was working two jobs. I was using the income from my side line to pay off this loan. Now that I quit my second job in July, I do not have this extra cash flow to pay off this loan. This is why I will include it in my HELOC.

I was paying 6,25% on the personal loan and I will drop it to 4,25% once it will be within my HELOC. I would have the opportunity to create a sub-account in order to keep track of this loan separately but I need to amortize it over 25 years in order to reduce my monthly cash flow. With the remaining 3K, I will do something else but it is beyond the scope of this post. I’ll tell you in January!

Stay tuned as tomorrow, I will reassess my situation and show how I decrease my cash flow by using my property to pay off my other debts.

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