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Let’s say you’ve found the perfect location for your new home but there are no good properties on the market. All you can find are fixer-uppers - properties in a “distressed” condition - but, if you renovate, you will have a great place to live. The first option is an unsecured personal loan. Most banks offer home improvement loans without having to tap into the existing equity. You need to pitch the project showing a design, a reasonably detailed costing of the materials required and estimates from builders, plumbers, electricians and their like for their labor. Most loans will be agreed in instalments so you can draw down as work milestones are reached.

More importantly, money well spent is stored in the higher resale price your home will command. Alternatively, your existing home may now feel cramped with a growing family, or just need improvement. Moving to another house is not going to be easy given the present state of the real estate market, so enlarging or improving your own home is the best answer. Thus, if you’re buying a fixer-upper, you need only take a mortgage for the price for the land and structure as is. Later when the work is completed, you can decide whether to consolidate the personal loan into the mortgage.

Alternatively, if you have sufficient equity in the building as collateral, you can get a home improvement loan either as a second mortgage or as part of a refinancing deal to pay off the existing mortgage and take cash out for the improvements. If you spend most of the loan on furnishings, these will depreciate in value through wear and tear. When you borrow, you’re putting your home at risk if you find the instalments unaffordable. If you maximized the resale value, let’s hope you will have some cash left over after a forced sale.

Although there are problems in the real estate market right now with resale prices falling, let’s focus on the general principles making the mortgage market work. When the housing market recovers, the equity becomes positive and can be used in a number of ways. At present, you’re likely to have negative housing equity where you owe more than the property is worth. Some people think of positive equity as a windfall gain or additional capital. Locked up in the bricks, it’s of little use, but there are two different kinds of mortgage to release some of this value. The amount of the existing mortgage is subtracted and you can borrow the remaining amount up to the limit. It’s better to use the credit for big ticket items rather than for day-to-day expenses, but there are no limits on how you spend the money. The second option is a home equity loan or refinancing mortgage that pays off the existing mortgage and creates a replacement including a cash-out lump sum. Thus, unlike the HELOC where you only pay interest as you use the credit facility, you pay interest on the whole sum from the time you draw it down. Other people consider positive equity to be savings. Thus, rather than the first view which can lead to you frittering away the value of your home, this gives you a solid basis for planning for your family’s future or your own retirement.

The majority of people refinance their mortgage because they are being squeezed by the current loan terms. But there are other reasons for looking seriously at a refinancing strategy. Let’s take an example of your life as a story of success. When you first took out your mortgage, you had a poor paying job. But that’s all changed. To make the instalments affordable, you went for a long term, say, thirty years. Now you could pay off the loan in half the time. So how do you make this work? First, you have to be able to afford significantly higher monthly repayments. Secondly, what is affordable now must still be affordable in one or two years.

The other increasingly common reason for renegotiation is to avoid a mortgage adjustment. During the last few years of the housing bubble, many buyers were sold on an adjustable rate mortgage. The idea is simple. You have a low starting interest rate but, at the end of the “holiday” period, the rate is reset or adjusted to a higher rate. All these contracts have a fixed period so everyone knows when the higher rate will hit, but not everyone knows what the new rate will be. Most contracts use the prevailing rate on a particular day + an agreed mark-up. Are you sufficiently certain that your circumstances are going to stay successful? Look around. There may be a recession coming.

If the new mortgage rate was going to be too high, homeowners could sell to realize their capital gain and buy another home on an adjustable rate mortgage. Except the bubble has burst and house prices are dropping so owners are caught with no capital gain and increasing monthly instalments. Whichever side of the coin you find yourself on, money is available in the lending market to help you get what you want. All you need is access to multiple lenders to get the best terms. That’s what you get when you use sites like this.

The problem with credit and store card debts is that you’re looking at high rates of interest for personal lending. Worse, it’s easy to get caught with penalty charges if you miss a payment. Debt consolidation always looks a good idea because you can roll up all the different high interest loans into a single package secured on your home. Because you’re paying this lump sum off over many years, the instalments are a significant saving.

The first time you should think about this is when you’re changing your home. Let’s say you are trading down. You have a good equity in the house being sold and the amount you’re paying for the new home will leave that equity largely untouched. Consolidating your existing personal debts into the mortgage loan can work well. You pay off all your other debts out of the sale price and free more of your income with the reduced repayments. Alternatively, you have an equity in your existing home and decide either to refinance your existing mortgage to include personal debts or you take out a second mortgage.

Then there are the tax implications and the extent to which other costs may rise, e.g. the mortgage insurance premiums. Even more important if the calculation shows that the consolidation is favorable is what you will do with the amount saved every month. The best possible strategy would be to use every cent of the savings to accelerate repayment of the mortgage. The first worst strategy would be to treat this a free money to spend as if there’s no tomorrow.

The absolute worse strategy would be to take on more personal debt. The thinking goes: house prices always go up sooner or later. When that happens, I can do another debt consolidation and write off all this new debt with another cash out. When you’re in a collapsing property bubble, this is a very bad idea.