When taking on a liability as large as a mortgage, its natural to want to reduce your debt level by paying off other loans. If you've been mortgage shopping, you've already seen that there are a variety of different loans available to you. Depending on the type of loan you apply for, you may be able to get a mortgage that exceeds the actual purchase price of the home. Although this leaves you with a cash surplus, the lender may reserve the right to dictate how you spend it.
There are several different types of mortgages and home loans that allow you to take out extra funds that you can then use to pay off other outstanding loans.
After you choose a home, your lender sends an appraiser to the property to determine its value. Provided your income and credit scores meet the lender's criteria, it will approve you to borrow from 80 percent up to 96.5 percent of the home's fair market value.
That doesn't meant that you can purchase a house priced under fair market value and automatically get cash back on your mortgage. If the home's value exceeds the purchase price, the lender will generally restrict your loan to the purchase price only -- regardless of how much the home is actually worth.
Home Improvement Loan
If the loans you hoped to repay with your mortgage were loans for repairs or improvements on your new home, special lending programs can help you obtain the money to purchase the home and renovate it at the same time. Both the Federal Housing Administration's 203(k) program and Fannie Mae's HomePath Renovation Mortgage offer this feature.
Although home renovation mortgage programs differ, they function in much the same way. The lender hires an appraiser to determine the home's value, determine which repairs are needed, and provide an estimate for how much the repairs will cost. You don't have full control over how you spend the extra money. Your lender retains the excess funds and uses them to pay contractors when the repairs or renovations are complete.
If you're searching for a new loan for a property that's already mortgaged, you may be able to pull some of the equity out of your home via a cash-out refinancing. In a cash-out refinancing, your lender pays off your previous mortgage and provides you with a new home loan.
Provided your home is worth more than you currently owe, you can borrow an amount that exceeds what you owe but is less than the home's total value. The difference is yours to keep. For example, if your home is worth $150,000 and you owe $100,000, you can refinance the loan for $125,000. The new loan pays off your old mortgage while also providing you with an extra $25,000 to spend however you wish.
Home Equity Loan
If you cannot get the extra funds you need via a mortgage, that doesn't mean that you can't use your home's equity to pay off your debts. A home equity loan is similar to a cash-out refinancing plan in that it gives you access to your home's equity, but unlike a refinance that replaces your existing mortgage, a home equity loan is a separate loan.
Although refinanced mortgages generally offer lower interest rates than home equity loans, a home equity loan can save you thousands of dollars in closing costs while still providing you with the money you need to pay off other debts.
- Bankrate.com: Cash-out Refinance: When Is It a Good Option?
- Mortgage Calculator: Beginners Guide To Refinancing Your Mortgage
- The Truth About Mortgage: What Is a Cash-Out Refinance?
- NOLO: Home Equity Loan and HELOC Basics
- PHH Mortgage. "Borrowing Basics: Home Equity Loans vs. Cash Out Refinancing." Accessed Dec. 17, 2019.
- Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or 'Junior-Lien'?" Accessed Dec. 17, 2019.
- Washington State Department of Financial Institutions. "Mortgage Refinancing Basics." Accessed Dec. 17, 2019.
- Discover. "Refinance 101." Accessed Dec. 17, 2019.
- FDIC. "State Housing Finance Agencies: First-Lien Mortgage Products." Accessed Dec. 2019.
- Citi. "The Refinance Application Process." Accessed Dec. 17, 2019.
- Discover. "Steps in the Home Equity Loan Application Process." Accessed Dec. 17, 2019.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.