Hi, everyone, how are you? It’s Leah Coss with The Mortgage Center. I’ve had a few of you out there ask me recently if you can wrap up your loans into your mortgage, i. e. maybe you have student loans, and you’re like, “I’m going to buy a house or I already have one. Can I just wrap up this loan into my home, so that now I don’t have my student loans? Or my car loan, or anything like that. I just want to wrap it up into my mortgage.” And I think that wrapping up term is really confusing a few of you into understanding exactly how that works. You’re not actually wrapping your loans up into your mortgage. What you’re doing is you’re consolidating, and a bank won’t look at the value of your home and the value of your car and add them together and say, “Oh, that’s the full amount, and so we will loan you X amount of percentage based on those two collaterals together.” They don’t do that.
A mortgage is a mortgage and loan is a loan, and those are two separate things, and they’re all based on different collaterals. Some loans are even based on no collateral. They’re just given to you on goodwill. That is absolutely not what a mortgage is about.
So, when you say, “Can I wrap up these loans?”, the only thing I can say is you can consolidate, but you can only consolidate for as much equity as you already have in your home. So for those of you who’ve bought a home with five percent down, you cannot consolidate anything. It is government mandate. You must have five percent equity in your home in order to be allowed to own it.
If you’re in a negative equity situation, then upon renewal, you’re going to be in trouble. So, at no point can you wrap up or i.e. use equity in your home to pay off another loan, because you need to have at least five percent in your home.
If you already own that home and you’re trying to refinance, now the new rules as of April, 2010 is that you have to have 10 percent when you refinance. So now, unless you have above and beyond 10 percent equity in your home, you cannot take out any of that equity to pay off i.e. wrap up any loans into your home. If you have 20 percent and above, then what you can actually do is create something called a HELOC, or a home equity line of credit, and this is basically just like a line of credit except it’s a secured line of credit, so it’s typically a better interest rate and it’s based off your mortgage, so…
Let that car go by. That’s awesome. So, with the HELOC, you can only do that if you have above and beyond 20 percent in your home. You must always have 20 percent in your home in order to get that. Check out my other videos. I have talked about consolidating debt and HELOCs before, H E L O C. So, that’s what that means. You cannot just magically wrap up debt into your home if you don’t have equity, and what you’re essentially doing is taking out your equity and spending it on this loan and just basically transferring debt.
Now is that a good thing? It can be. If you have like right now, with all the rates being so incredibly, historically low whether you’re in a fixed or a variable, chances are that rate might be a heck of a lot cheaper then your credit cards, your car payments, student loans, everything like that, and yes, it might make sense to wrap up your debts or consolidate using the equity in your home. But many of you cannot do this if you only have five or ten percent.
Actually, in most cases, I will recommend never consolidating unless you have at least 20 percent in your home. Once you hit below 20 percent, you’re having to pay mortgage insurance fees all over again, and to me, that’s a waste of money. Just wait until you’ve built up equity in your home of 20 percent, and feel welcome to just maintain that happy 20 percent in your home and consolidate the rest of your debts with the additional equity that you earn.
But if you have any questions about a HELOC, about consolidating, about wrapping up debts into your home, or refinancing, please give me a call and let me know. I’d be happy to answer questions and give you my opinion on what I think the best route is for you, whether the situation that you’re in now, having multiple debts is better, or whether consolidating, using the equity in your home is the better solution. So, Leah Coss with The Mortgage Center. Hopefully I’ve helped you out, and hopefully I’ll be talking to you soon.