Personal Finance > Your Home
Double trouble: Stuck with two mortgages
Your old house hasn't sold and you're about to commit to another. Here's what to do.
October 9, 2002: 3:27 PM EDT
By Jeanne Sahadi, CNN/Money Staff Writer

NEW YORK (CNN/Money) - As if buying a house isn't stressful enough. Now you realize in order to make that new home yours, you may end up having to close on it before you can sell your old digs.

Maybe your buyer fell through at the last minute, or unforeseen delays have clouded the deal. Or maybe you didn't make the purchase of your new home contingent on the sale of your old one -- a common scenario in sizzling housing markets where sellers set the rules. Or maybe you were forced to move quickly because of a job change to a new location.

Whatever the reason, you're facing a pricy conundrum. Mortgage payments, property taxes, insurance premiums and maintenance costs times two. Not to mention having to come up with a down payment for the new home.

The good news is, homes have been moving quickly in many markets, so even if there is some overlap between closings on your homes, it may not be extensive.

Nevertheless, financing the transition and making the problem disappear are your top priorities. There's no easy solution, but there are a few options.

Straddling the hump

For starters, if you've got enough in cash savings, you can tap those reserves to make a big enough down payment on the second home so that you can secure financing for it in spite of your other mortgage. Or you can borrow from friends or family. In either case, your income will have to be large enough for a mortgage banker to approve the loan.

Another option is to get a bridge loan, a short-term loan (typically six months) that allows you to borrow against equity in your old house.

"There are a variety of methods by which bridge loans are made," said Keith Gumbinger, vice president of mortgage tracker HSH Associates. For example, a bridge loan is often used to provide the down payment for your second home. If you own a $200,000 home in which you have $50,000 equity, you can borrow up to $50,000.

Another type of bridge loan is similar to a cash-out refi. You replace your first mortgage with a newer, larger mortgage. With this kind of bridge loan, you can borrow up to 80 percent of your home's value, and pocket the difference in cash after costs. Such a loan will allow you to pay off your first mortgage and secure the down payment for your new home.

In this case, the amount you can use as a down payment on your second home is equal to the bridge-loan amount minus the following: the balance remaining on your original mortgage, your bridge-loan closing costs (comparable to that of a refi), points (usually a point and a half of the loan amount), and six months of interest on the bridge loan payable up front to the lender, said John Watts, a mortgage broker with Allied Home Mortgage Capital Corp.

Bridge loans can be pricey -- your out-of-pocket costs can total up to 10 percent of the loan amount, said Ray Brown, coauthor of "Mortgages for Dummies," who doesn't advise taking them unless you're flush enough to carry two homes indefinitely or you have a nearly completed sale on your first home. The final cost of such a loan depends in great part on how quickly you sell your home and on the interest rate you get on the loan. Typically, the rate is a few percentage points above the prime rate, Gumbinger said.

Bridge loans are not offered by many lenders, and requirements to qualify are much like other loans, Watts said. When you apply for financing on your new home, the bridge loan acts as a ghost debt, he said -- it doesn't register as debt you're carrying because you've prepaid the interest on it for six months. But if you can't sell your home for enough to pay back the bridge loan and you can't make up the shortfall, the lender may have the right to foreclose on your new property.

Other financing options

You may also use a home equity loan (HEL) or line of credit (HELOC) to finance the purchase of your new home. Both allow you to borrow against the equity in your first home. With interest rates as low as they are, HELs and HELOCs are relatively cheap sources of money and the interest you pay is often tax-deductible. "If you've already got one set up, you're good to go," Gumbinger said.

But if you're thinking of taking one out after you've put your home on the market, you may have trouble. Lenders often won't make equity loans if your house has been up for sale in the past six months -- something they can track if your house was registered on a multiple listing, said Joe Sinisi, another broker with Allied.

If you think you can carry two homes for a time but want to lighten the load, you may be tempted to refinance your old house to lower your monthly payment. That could work, unless you've already moved out. Lenders generally do not offer the best refi rates for non-owner-occupied residences. Nevertheless, check to see how long you can be out of your house before it's deemed "non-owner-occupied." Lenders define that period differently, Gumbinger said.

Rent for a little cash relief

Whatever financing route you choose, there's no easy way to make your problem disappear. But if your house is taking much longer to sell than anticipated, there are two things you might do to limit your burden: rent out your first residence and adopt a new approach to selling it.

Renting month to month is ideal but hard to swing unless you live in an area that attracts people who can be flexible about moving on short notice, said certified financial planner Janet Tyler Johnson. University towns, big cities and their bedrooom communities might qualify.

Your tenants should be told your goal is to sell the house as soon as possible and ideally you should charge enough to cover your monthly expenses.

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If you get good tenants who keep the place in great shape, that might actually help the house sell. "It can help to have someone say, 'We love this house' than to have it sit empty for eight months," Johnson noted.

But renting is by no means a cure-all. If you lock into a year-long lease, Brown warned, that handicaps your negotiating position with a buyer and the market for homes in your area could worsen during that period. Plus, tenants may damage the property; you may have to get more liability insurance; and while you'll get a tax write-off for depreciation on the house, when it finally sells you may have to subtract that depreciation from your tax-free gain.

Get serious about selling

The best solution, of course, is to sell your old home.

Often, the real reason a house won't sell is not disinterested buyers, but a seller who falls prey to "need-based pricing," Brown said. As in, "I need to get X-amount because that's what I paid for it." Either that, or sellers equate the value of their home with similar homes in pricier neighborhoods.

"If you've been aggressively marketing your property for six weeks and if you don't have a bloated dead cow in your front yard, your house is probably priced 10 percent over fair market value," Brown said.

If you're having trouble stomaching a 10 percent price drop, calculate how much you'll be spending every month to keep the house on the market and figure out at what point the delay in sale will eat up that extra 10 percent.

(For more tips on selling a home, click here.)  Top of page

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