Can I buy a home and consolidate my debt with a home loan?
I am 25 years old and would love to purchase a home in the near future. I am currently renting. I am a teacher and I have some bills from school, moving expenses, car payment, etc. I was wondering if I would be able to get a home loan and enough extra money to consolidate all of my bills into one payment along with my mortgage? Is this possible?
To answer your question first, when you buy a home, you usually cannot get a loan at closing in the form of extra funds to pay pre-existing creditors using the home as collateral. Initially there is no value in the home that you could offer as collateral to secure the repayment of the extra money to pay-off the current debts. The home’s value is used to secure the promissory note, which then becomes a mortgage.
When you buy a home, there is normally not much equity in the home for you for several years after closing (unless, of course, you put down a large down payment which is instant equity — but that does not apply in your situation).
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Equity is built by making the mortgage balance smaller by making payments, and/or by the value of the home increasing year-to-year by the neighborhood becoming more desirable (especially as to schools and attributes like civic cohesiveness) and/or if you make substantial improvements such as additions of rooms, amenities — such as pools, weight rooms and cardio areas, saunas, hot tubs, tennis courts, theaters, libraries, etc. — so that if you sell it, the price would be much higher than when you bought it. For most of us the above options boil down to the "making payments" option, which is a great choice, given the alternative which I do not need to state. The problem with making payments to build equity is that the amortization schedule is stacked against the quick development of equity. For example, in the first 15 years of a 30 year mortgage a larger portion of each monthly payment is applied to the pre-computed mortgage interest than to principal according to the amortization schedule that you should receive at closing as part of your closing packet.
Therefore, a home functions best as a very long-term investment, if one should look at the home as an investment at all. Its gain is typically slow and steady with no precipitous losses either. While this conservative concept of the residential mortgage is loosening, the 30-year mortgage remains as part of our collective dream. This attitude is why the term has been traditionally pegged at 30 years.
When you have developed some equity in the property after a few years, you could then refinance the existing mortgage and substitute a new mortgage and take out some or all of the equity to pay those debts off — but the building of the equity is the perquisite.
I hope that his helps you make the right decision for your particular situation, but be sure to shop around and find a loan that meets your needs.
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