Ellis Glink and Samuel J. Tamkin
Q: My partner and I are putting an offer on a house in the near future. Our current home is about $200,000 less than the new home we plan to buy. And paid in full.
Once the current home is sold, we can take ownership of the new home. We have enough money to make up the difference and then some, but not enough to cover the purchase price and closing costs of the new home. In the three to six months between closing on the new home and closing on our current home, we need to borrow about $300,000.
What is the best loan product for that three to six month period? Do we take out a $300,000 loan on the new home and pay it off in full with the proceeds from the sale of the current home? Are there better options for a short term loan for this amount? We both have good credit scores and healthy retirement accounts.
We do not want to hold a mortgage on the new home after the current home is sold.
A: Given the amount of money you have on hand, you have more financing options than you might think. Several options come to mind: Get a new first mortgage on your current home or take out a home equity loan (HELOC) on your current home.
If you take out a new original loan, the closing costs may be higher, but the interest rate you can earn as long as you have the loan will be low and fixed. You may also be able to trade any out-of-pocket costs for a slightly higher interest rate. A home equity line of credit may have a variable interest rate but may have little or no costs to obtain.
With these two options, you should weigh the pros and cons of each type of loan against the costs. If you sell your existing home quickly, we think you’ll be better off with little or no upfront costs, even though interest rates can be high on equity loans. On the other hand, if it takes time to sell your home — a situation that’s unlikely to happen because of the strength of the seller’s market nationwide — a fixed-rate mortgage can pay a lower interest rate.
So, these are the options if you decide to finance your existing home. But you can also take a loan on the new property. One advantage of getting the loan on the new home is that you have the option to keep the loan after the old home is sold.
We found that you do not want to take out a loan on the new property, and you can pay it off immediately, but you can find another use for the cash (investment or second home purchase), and this gives you. Options.
Your best bet is to sit down with a mortgage lender or mortgage broker and discuss how the numbers play out. Depending on the current home value, you may not be able to borrow the full $300,000 you need. Likewise, lenders may limit the amount you can withdraw when you cash out your home.
For example, if the lender only allows you to borrow a percentage of the home’s value and the $300,000 you want is more than that percentage, you can’t go forward. Better to take a loan on your new home.
One thing to keep in mind is that most lenders will not or will not allow you to open a line of credit on a home listed for sale. So make sure you apply your loan thoroughly before listing the property.
We recently wrote about a few new ways to finance a purchase in our recent column on real estate trends for 2022. iBuyers and other “power buyer” companies will give you money to buy your new home and then (if you need help) help you fix up your existing home to sell. They usually take a percentage of the sale price or invest with you and get their money back (and then some) when you sell.
Most of these iBuyer and “power buyer” options may not suit your exact needs, but you should feel free to explore which process (traditional loan or one of these) will give you the money you need at the lowest cost. Before making your final decision, start with a local lender and be sure to shop around with several mortgage brokers and perhaps an online bank or regional lender.
Contact Elise Glink and Samuel J. Tamkin at their website, BestMoneyMoves.com.