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Myths about Canadian debt consolidation

There are a few myths that you should know about when it comes to refinancing your debt.

You may hear of some popular ways to reduce your cost of debt, or eliminating it.  Be careful.  Always check with a certified Canadian mortgage broker or lender before you make a major decision.

I will review a couple of the major misconceptions below.

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The first trap to watch out for is rate blending. 
A popular mortgage tool is to blend 2 interest rates together.  For example, if you have a first mortgage with a rate of 4%, and you are getting a second mortgage of say, 12%, then the lender may try to downplay the cost of the second mortgage by saying that the overall rate would be 6%.  That may in fact be the case.  But what it is really doing masking the high cost of the second mortgage by using the low cost of the 1st mortgage.  Perhaps a better solution would be to increase the first mortgage at the current rate, instead of getting a high cost 2nd mortgage.

Another common myth with a brokered Canadian loan is that lowered monthly payments are the financial yardsticks that wise refinancing is measured by.  Monthly payments are only comparable if they are based on the same loan duration!  This is called the amortization period. Yes, a longer amortization period will reduce your monthly payments (ie 25 years versus 20 years), but the cost of borrowing will rise.  The faster you pay off a mortgage, the less interest you will pay.  So, with a longer amortization period, your monthly payments will be lower, and perhaps fit in more nicely with your monthly budget, but you will be paying more for your house because of the extra 5 years. 

And one more misconception about refinancing with a
debt loan in Canada is that if the new rate is not at least two points lower than your existing mortgage rate, then refinancing is not worth the time and trouble. In many cases, especially if you are planning to stay in your home at least three to five years, even a one-point reduction can make an enormous difference in your overall home mortgage cost.


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