Caught between two houses
You've found a new house, but your hold one is still on the market. How to juggle two homes and bridge the financing gap.
NEW YORK (Money Magazine) -- Question: We've found our dream house - more space, great location - but haven't yet sold the home we own now. What's the best way for us to finance the purchase?
Answer: This is a common dilemma nowadays, given the surfeit of homes on the market. Assuming you don't have an extra $100,000 or so lying around, you have two options to help with the down payment, and possibly the mortgage payments and property taxes for both houses until you sell the old one: a home-equity line of credit or a bridge loan.
Your best bet, if you haven't already put your home up for sale, is the home-equity line of credit, says Tucker Watkins, a financial planner in Irvine, Calif. It's cheaper (recent average rate: 8.75 percent), with fees generally under $300 (if you pay fees at all).
And a credit line is still easy to get these days, even with the credit crunch, as long as you've built up sufficient equity in your house. Just make sure your lender doesn't impose any prepayment penalties or exit fees.
Your alternative is the more expensive bridge loan, typically a one-year interest-only loan specifically designed to cover the financial gap between buying a new home and selling the old one, using the older house as collateral.
Rates run one to two percentage points higher than a credit line, and you'll also have to pay up-front points and closing costs equal to about 2 percent of the amount you're borrowing.
Fewer lenders offer this type of loan, so expect to call numerous banks to find one. To qualify you'll have to show that you have enough in the way of income and assets to temporarily cover the mortgage payments on both houses and other costs of ownership.
Not so easy, eh? So here's a radical thought: Unless you have to move - for instance, if you're relocating for a new job - maybe borrowing more isn't the answer.
What you should do first is get more aggressive about selling the house you already own - say, sharply lowering the price or hiring a stager to make it look more inviting to buyers. After all, in this market it could take months, even more than a year, to sell your house.
Or at least make your offer for the new house contingent on the sale of your old one. If the seller refuses, walk away. Given the flood of houses hitting the market, another dream home will likely turn up - really - maybe even at a better price.