Q: My partner and I will be making an offer on a home in the near future. Our current home is worth about $200,000 less than the new home we plan to purchase. And it’s fully paid off.
We will be able to own the new home outright once the current home is sold. We have enough cash to make up the difference and then some, but not enough to cover the entire purchase price and closing costs for the new home. We will need to borrow about $300,000 for a three- to six-month period between closing on the new home and closing on our current home.
What is the best loan product for that 3 to 6-month period? Should we take out a mortgage on the new home for $300,000 then pay it in full as soon as we have the funds from the sale of the current house? Are there better options for a short-term loan of that size, for this purpose? We both have good credit scores and healthy retirement accounts.
We do not want to carry a mortgage on the new home after the current home sells.
A: Given the amount of cash that you have on hand, you have more financing options than you might think. Several options come to our mind: Obtain a new first loan on the home you currently own or take out a home equity line of credit (HELOC) on your current home.
If you take out a new first mortgage, the closing costs might be higher but the interest rate you might get will be lower and fixed for as long as you have the loan. You may also be able to trade off any out of pocket costs for a slightly higher interest rate. The equity line of credit might have a variable interest rate but may have few or no costs to obtain.
With these two options, you’ll have to weigh the pros and cons of each loan type along with the costs. If you sell your existing home quickly, we think you’re better off with paying little to nothing in upfront costs, although the interest rate might be higher on the equity loan. On the other hand, if it takes time to sell your home — admittedly an unlikely scenario due to the strength of the seller’s market nationwide — the lower interest rate of a fixed rate mortgage might pay off.
So, those are options if you decide to finance your existing home. But you could also take out a loan on the new property. One benefit of having the loan on the new home is that you’d have the option to keep the loan once the old home sells.
We get that you don’t want to carry a mortgage on the new property, and you can pay it off immediately, but you may find you have another use for the cash (an investment or a 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 value of the existing home, you may not be able to borrow the full $300,000 you need. Likewise, lenders may limit the amount you can take out when you do a cash out refinance your home.
For example, if a lender will only let you borrow a certain percentage of the value of the home and the $300,000 you seek exceeds that percentage, you won’t be able to move forward. You’ll be better off taking out a loan on your new home.
One thing to remember is that most lenders will not refinance or allow you to open up a line of credit on a home that is listed for sale. So, make sure you apply for your loan well in advance of listing the property.
We’ve recently written about a few new ways to finance a purchase in our recent column about 2022 real estate trends. So-called iBuyers and “power buyer” companies will give you cash to buy your new home and then help you (if you need help) fixing up your existing home to sell. They’ll often take a percentage of the sales price or they will co-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 lending or one of these) will give you the cash you require for the lowest possible price. Start with a local mortgage lender and make sure you shop around with a variety of mortgage brokers and perhaps an online bank or regional lender before you make your final decision.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)