Can You Get Extra on a New Home Loan to Pay Off Other Loans?

You can take a cash-back mortgage to repay an existing loan.

The size of your mortgage is not limited to the cost of your new home. You may take a mortgage of any size and apply only part of the loan to your current house. This can allow you to purchase other assets, pay for college or even repay other debts. However, your home is used as collateral for the entire sum. If you cannot repay the loan, you will lose your home.

Types

There are several options for repaying other loans by getting extra money on a home loan. One option is to have your new mortgage lender repay your debts directly. For example, if you have a current mortgage and would like to buy a new home, the new lender can issue a large loan, repay your existing debt and pay the seller of your new house. Another option is to enter a cash-back mortgage. In this scenario, the mortgage lender purchases your home and gives you any cash left over in the loan. It is also possible to enter a cash-back refinance on your current house. If you wish to stay in your property and have accumulated equity, this option allows you to take a new mortgage and pull a portion of cash out of that equity. You can choose how to spend this cash. Common reasons for refinancing for cash back include improving your home, paying for college, funding retirement or covering an emergency expense.

Benefits

When your new mortgage pays off your existing debts, it acts as a consolidation loan and a mortgage. You have only one large debt going forward, instead of a mixture of debts. Further, you do not have to personally bear the expense of repaying these loans at the same time you are purchasing a home. You may need the extra cash in order to furnish your home or modify it to your specifications. By allowing your mortgage lender to assume an existing expense in your life, you can free up some cash at a critical time.

Risks

You are considering taking a larger mortgage loan than you need to take. This will raise your monthly payments and it can put your house at risk unnecessarily. For example, you may take a mortgage large enough to repay your current car loan. Now you have a bigger mortgage payment. If you cannot make that payment in full you will risk losing your home. If you had not combined the loan you would have the option of paying your mortgage but not your car loan. In that case, you would only lose your car and not your home. By combining your loans you have added to the risk of your mortgage.

Alternatives

Instead of taking a large mortgage, consider taking two loans. Take a mortgage only in the amount you need to purchase the home, and place the deed to the home down as collateral. Then take a home equity loan that is subordinate to your mortgage in order to repay your other debts. This loan still uses your house as collateral, but it is much harder for a subordinate home equity lender to foreclose on your property if you are late on payments or default on the debt.

Expert Insight

The Federal Housing Administration (FHA) offers options for cash-back mortgages and streamlined loans for fixer uppers. Depending on your scenario, one of these options may be affordable and lower risk than taking a conventional mortgage. Research FHA loans to determine if one of the programs may help in your scenario.

References

• FHA.com: Cash Back
• FHALoan.com: FHA Streamline Loans