Closing on the New House While Selling the Old
The housing market has cooled off quite a bit since the Federal Reserve started raising short-term rates. In many places of the country, it is now considered a "buyer's market." There is a surplus of homes for sale and buyers have the freedom to take their time and be picky. Sellers are having a harder time getting rid of their homes and are having to come up with creative ways to make their home more enticing than their neighbors.
So what can you do when you're trying to sell your old home while buying a new one? Well, one option is to get a "bridge loan".
A bridge loan, also known as a "swing loan," is a short-term loan that is very similar to a home equity loan in that you use the equity in your current home to put a down payment on the new home while you try to sell the old one. Usually, you get a bridge loan for six months, though it can be shorter or longer. Ideally, when the old house is sold, the proceeds pay off the bridge loan and the mortgage from the old house so that all you're left with is the mortgage on the new house. However, the difference between a bridge loan and a home equity loan is that a bridge loan is used specifically to "bridge" the time period between selling the old house and closing on the new one. You must also have a contract of sale on the old house; otherwise, you won't qualify for a bridge loan.
If you don't have a contract of sale, you could also get a home equity line of credit which is a second loan on your current house. You can use it to finance big ticket purchases like buying a new home, as in this case.
But a different type of loan is emerging into the market that could help you out. It's a type of interest-only loan that includes a seller contribution. Here's how it works: the seller of the home you're buying contributes money from the proceeds of the sale of his house toward the deal. But instead of contributing money toward closing costs or purchasing points, the seller agrees to pay up to six months of the your mortgage interest. Since it's an interest-only loan, you are only responsible for paying the property taxes and insurance.
The benefit to the seller is that he sells his home faster. But it's even better for you because that gives you time to sell your old house without making principal and interest payments on two mortgages. Even if you don't sell your home in six months, your interest-only payment will still be lower because you aren't paying principal.
Tip: Interest-only periods may vary from lender to lender, so make sure you are getting one that allows you the flexibility to pay interest-only for as long as you'll need. Look for lenders that offer interest-only periods of up to 10 years.
If you're buying a new home while trying to sell your old one, your best bet is to get an interest-only loan with a seller contribution of up to six months interest. It's a better alternative to a bridge loan since you're not necessarily committed to a six-month term. It's also a better alternative to a home equity line of credit since the seller is putting up the money, not you. Talk to an experienced mortgage banker to find out what choice is best for you.
By Diane Tuman
- Last edited October 12 2012
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