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Build the Expectation about Future: Remortgage for Debt Consolidation
- Leverage on equity from your property
- Calculate the expected amount for debt consolidation from remortgaging
If you are United States citizen faced with the problem of recapitalising your outstanding unsecured debt, then there are several options you can draw upon. One of them is debt consolidation, which is mainly more advisable for people who have incurred debts of more than USD20000 and face potential failures on their monthly repayments. In addition, to qualify for such debt consolidation loan, you should have an ability to leverage on equity from your property. This type of financial product is called remortgaging for debt consolidation and is offered by many financial providers as a part of mortgage debt reduction plan.
So how does this work? If you have incurred debts that are large enough to justify large transaction fees of remortgaging, you can use your property as collateral for the arrangement of new loan. The issuer of new debt would revalue your property at current market value in order to set up the terms and conditions for new mortgage.
You would be in much more favourable position if current outstanding value of your home is higher than the value backing original mortgage. This means that you can get higher mortgage and use the remainder to repay your debts as part of your mortgage debt reduction plan. However, if your house has decreased in value from the time of the arrangement of your first mortgage, you are more likely to face much more unfavourable funding terms on your second mortgage.
Graph 1: How remortgaging for debt consolidation works
The fund provider would consider the amount of the mortgage you have already paid out and current market value of your property, when issuing new mortgage. If you are in the process of preparing mortgage debt reduction plan, then you can use the following formula to calculate how much debt you can raise via remortgage for debt consolidation.
Firstly, calculate the amount you win/lose on the appreciation or depreciation of the value of your house: value at initial mortgage arrangement minus current value of the house. Then calculate how much of the debt you have actually repaid and hose much of original mortgage you have outstanding.
Finally, deduct from current value of the house the amount of original mortgage to repay and you would roughly get to the amount of how much you can expect the remainder for debt consolidation to be. If the value of your house depreciated over time, then the amount for debt consolidation would be roughly the difference between the values and the fraction of mortgage that has been already repaid.
It is wise to perform thorough market analysis prior to remortgaging as a part of your mortgage debt reduction plan. This is mainly because if the value of your house has depreciated, you should make sure that you build the expectation about the future movement of your house value. If it is likely to depreciate even further, then remortgage now and repay unsecured debts. If it is likely to appreciate in the nearest future, then wait and remortgage when the market value goes up. It will increase your chances of getting larger amount for debt consolidation.