Consolidate Debt With New Mortgage

Perhaps during the go-go days of the mortgage boom five to ten years ago a creative deal that would have allowed a home buyer to consolidate debt in a mortgage would have been written. But this is 2010, the mortgage party is over, and scrupulous mortgage brokers who now need to pass a federally administered examination to work in the field, play by the book.

I think it highly unlikely that you will be able to structure the deal you suggested with a conventional mortgage because you would be altering the loan-to-value ratio of the deal to add in your existing debt. Let me illustrate with a simple example. Let us say the market value of the property is $100,000. A broker will find a loan where the bank will probably want a 20% down payment, which is $20,000 in this case. What you are really asking the bank to do is lend you more than 80% of the value of the home so that you can retire your existing debt. The bank will not want to do so if it has a policy of lending at 80% LTV.

Let us assume for a moment that that you can find a direct lender that will give you a loan at 100% LTV, which may not be possible with a broker. By trying to add in the existing debt, you are taking the loan beyond 100% LTV. In today's real estate market, I would be very surprised if you could find a direct lender to write such a loan.

Construction Loans

One far-fetched possibility is to get a construction loan. There are two basic types of construction loans: construction-only loans and construction-to-permanent loans. The primary difference between these two types of loans is what will happen after your home is built. Construction-only loans are short-terms loans that are designed to pay for the construction of the home and which must be repaid after construction is completed.

The key benefit to using construction-only loans is that they provide borrowers with flexibility to finance their completed home with a wide variety of mortgage loan products, giving them freedom to shop around for the best mortgage interest rates and terms across the market.

Construction-to-permanent loans (CtoP) are where the loan, which starts as a construction loan, converts to a mortgage loan automatically after the home construction is complete. This type of loan is probably the more popular of the two common types of construction loans for two reasons.

First, they are convenient for borrowers, as borrowers do not need to worry about finding a mortgage loan to finance the property and pay back their separate construction loan. Building a home can be very stressful and the fewer issues that borrowers need to worry about the easier the process becomes. Borrowers also do not need to pay for two loan closings.

Second, CtoP loans are often encouraged by lenders due to the fact that this type of loan allows the same lender to keep control and retain the profits of both the construction loan and the post-construction mortgage. CtoP loans, therefore, are often more profitable for lenders than construction-only loans.

Here, the advantage of a construction loan is you may be able to use some of construction funds to retire the existing debt. I write "may" because it is common for banks to review construction expenditures. If paying for non-construction expenses is contrary to your loan agreement the bank may stop funding the construction of your house if you try to slip through a payment to your existing creditor.

To read more about mortgage loans and the various programs available to borrowers, I encourage you to visit the Bills.com mortgage page. Go to the Bills.com mortgage saving center for no-cost, pre-screened quotes from mortgage lenders.

I hope this information helps you Find. Learn & Save.

Best,

Bill

www.bills.com/