This process involves transferring your mortgage to a new lender, who will pay off your existing unsecured debts (e.g. credit cards) and then include that amount in your new mortgage. Once your new mortgage lender has paid off all of your debts, you will then be responsible for making your new regular mortgage payments.

How it works

When refinancing your mortgage, the first step is to find a licensed mortgage broker

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. A credible mortgage broker will be able to inform you about current mortgage rules, and help you make the right decision about whether to refinance your home and which lender to get your new mortgage with.

The most important requirement for refinancing your home is to make sure that you have enough equity. Currently, this is based on a loan to value (LTV) ratio of 80% or lower. This means that you may borrow up to 80% of your home’s total appraised value. So, if your home is currently worth $500,000, then the total value of your new mortgage (including the old mortgage and any new debts you roll into it) cannot exceed $400,000. Keep in mind that this is a maximum value, and if other requirements such as having a good credit score are not met, then the loan to value (LTV) ratio may decrease. Therefore, you would be allowed to borrow even less, for example, only 60% of the home’s value.

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When to refinance your home

Due to the fees associated with this process, such as getting an appraisal for your home, and paying a lawyer to process the paperwork, it is usually recommended to refinance your mortgage only if you are paying out a substantial amount of debt. It is also important to consider what type of mortgage you currently have, and when it is due for renewal. If your current mortgage is only halfway into its term, and there are financial penalties for breaking it early, then your mortgage broker may suggest a second mortgage instead. Also, due to increasing mortgage rates, the new mortgage may be offered at a slightly higher interest rate than your existing mortgage (approximately 1% to 2% higher).

Other factors that will determine whether you qualify for refinancing are your income and credit score. The general rule is that the better your income and credit score are, the lower the interest rate you will be given. The minimum requirements for both of these will vary between different types of lenders (eg. banks vs. private lenders). Therefore, it is still possible to be approved for refinancing even with poor credit, however it will likely be at a higher interest rate, which could end up costing you more overtime. Ideally, the rate of your new mortgage should be similar to the rate of your existing mortgage, but much lower than the interest rates of the unsecured debts which you are looking to pay out.

Impact on credit rating

Refinancing your home has the potential to improve your credit ratings and credit score in a short period of time, because you will be paying off your existing debt right away. Therefore, any debts that are negatively reported on your credit report will be changed to reflect paid in full status after the refinance. There is usually no negative impact to refinancing your mortgage on your credit report or credit score.

Advantages	Disadvantages
save thousands of dollars in the long run if used correctly positive impact on credit report and credit score pay out large amounts of debt in a short period of time	higher fees associated with it, so should only be used to pay out large amounts of debt requires a certain amount of home equity to qualify difficult to get if you have poor credit

In the right situation, refinancing a mortgage to include your debt could end save you thousands of dollars in the long run, while reducing the burden on your monthly debt payments. A mortgage broker can review your situation thoroughly to let you know if this home equity product makes the most sense for you.