What Is the Easiest Way Consolidate Debt & Finance a Home?

Killing two birds with one stone by consolidating your debt in a new purchase mortgage may sound like a good idea. After all, you would have just one payment and likely enjoy a lower interest rate than if you held your debts separately. However, you have to have enough equity in your home to allow this.

Equity

In order to use your home to consolidate debt, whether it is a new purchase or not, you have to have enough available equity in the home you are buying. Equity is the amount of the home you own fully. For example, if you put down $30,000 on a $150,000 home, you would have 20 percent equity instantly, or $30,000 of equity. Some lenders will allow you to consolidate your other debts into a new purchase mortgage, so long as the total amount of those other debts do not exceed the amount of equity you have in the home.

Down Payments

If you have a very large down payment set aside for your new home, it may make more financial sense to use some of your down payment to pay down or pay off your existing debt instead of rolling your existing debt into the new purchase mortgage. Consolidating your existing debt into your mortgage will reduce your currently monthly payments, but by using some of your down payment to pay off your debt, you can save several thousand in interest than if you had consolidated everything together.

Second Mortgage

Alternatively, you could consider taking a second mortgage to pay for your other debts. While, on the down side, you will have to make two payments instead of one, your total costs will be about what you pay by using your down payment to pay off your debt, in other words without consolidation. Moreover, you will also enjoy a slightly smaller payment than if you did not consolidate your debt.

Using Equity

If you do not have enough available equity during or immediately after purchase, by waiting a few months, or years depending on the real estate market, you can generate enough equity to allow you to consolidate your debt. This can be done by tapping into your equity through a home equity loan, home equity line of credit, or a cash-out mortgage refinancing. Refinancing typically has higher closing costs but a lower interest rate than equity-based loans. However, equity-based loans are usually over a shorter period than refinancing, so be sure to compare the total amount of interest you will pay before making a decision.