Buying new home before selling old one - financing
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I’m not a RE or mortgage specialist (which is a nice way of saying I probably don’t know what I’m talking about) but I would think one of those “no closing costs” loans might be an idea. The closing costs are baked into the higher interest rate, but if you only pay on the loan for six months or so, it wouldn’t be as much as traditional closing costs. Do they usually have a prepayment penalty? I don’t know.
Depending on all the details of what sort of equity you have in your current home, the status of your overall debt-to-income ratio, how costly a home you'd like to buy, and other factors like how long you will likely stay in the new home there might be some 'creative' ways to leverage loan products that typically are designed to help buyers with less than excellent credit. The category of loans known as "Option ARMs" have a bit of a bad reputation because they are rather complex and sadly too often are not fully understood by either the lender or the borrower. That said IF you have talked to knowledgeable and trustworthy local mortgage brokers or even the rare banker (I have had a bit of experience with a few US branches of Canadian based banks that seem to have somewhat more sophisticated mortgage specialists than the typical US bank, this may be due to the slightly different focus especially when it comes to folks who while not quite "private wealth rich" are at least used to paying very high prices for homes in Canadian cities like Toronto & Vancouver...) that truly does understand how these products can give someone increased financial flexibility you MIGHT want to consider this path -- Option ARM Loan: Typical Features, Advantages, Pay Option ARMs
There are online calculators that allow you to see the effect of various terms when deciding whether this is going to work for your situation, I would be especially concerned with how the loan changes when you make either a single large payment or perhaps spread out more payments. The period during which the loan's initial rate does not change is quite critical for someone planning to use this as essentially a "bridge" for the period of dual home ownership. So too would it be vital to be comfortable with the frequency of changes to the interest rate. Of course given that most folks strongly believe we are in a rising rate environment you should be very wary that this sort of loan has the potential to become quite costly, thus the ceiling or cap must be a number you can accept. It is also critically important that you understand initial payments that are calculated as "interest only" have high likelihood of creating a negative amortization. The shear number of variable for this type loan should not by itself scare off anyone, but it demands that the borrower have a solid understanding of the potential pitfalls and only work with a smart and trust worthy lender -- Pay Option ARM Calculator: Minimum Payment, Fully Indexed Rate
I am retired so what I did was quicken loans. They work with Charles Schwab and used my retirement accounts to make a pension. Take 70% then divide by 60 and take that amount per month as income. I paid 20% down and kept the mortgage after selling my old house.
A bit more informed now, tho we still have not done anything. One lender suggested take out a loan and hopefully we qualify for the amount we'd need. Another lender suggested we start shopping HELOCs, get as much as we can and get a loan for the rest. I still don't get the pros/cons of each option. Maybe I'm making too big a deal of it. Any advice for what sort of terms to look for in the loan, assuming we're going to pay off much of it as soon as first house sells? No prepayment penalty obviously, but besides that?
I would advise against a HELOC. Rates are higher and then you would probably want to get a mortgage on the new house. Too much in fees. I would just get a mortgage on the new home. I am not sure where you are but I see big changes in the real estate market. Things are slowing down. Most people buy a home with a mortgage.
A bit more informed now, tho we still have not done anything. One lender suggested take out a loan and hopefully we qualify for the amount we'd need. Another lender suggested we start shopping HELOCs, get as much as we can and get a loan for the rest. I still don't get the pros/cons of each option. Maybe I'm making too big a deal of it. Any advice for what sort of terms to look for in the loan, assuming we're going to pay off much of it as soon as first house sells? No prepayment penalty obviously, but besides that?
Go with what "another lender" said.
For example, get an 80% LTV bridge loan against your current house and put all that down on the new home. Take out a loan on the new home for the difference. A seller is probably not going to be too concerned about a buyer putting a 60% down payment on the purchase vs. the cash buyer.
Do you live in a state without a mortgage recording tax?
If so, another option would be to take negative points for a higher rate. In my experience, brokers and lenders will bend over backwards to accommodate someone trying to take a mortgage that is above market rate. They overlook many issues in those cases because the broker makes a killing off of your loan and the lender also frequently makes a killing by reselling your loan shortly after.
Then, after you sell your other house, refinance using a zero closing cost refi (usually market rate + .125%) and walk away happy.
I've done this on two houses now- in both cases, the negative points were in excess of my closing costs so the extra went into my escrow for property taxes (i.e. free money). The refinances were always free too- by taking 3.75% when the true market rate was 3.625%, I paid zero out of pocket and from a present value perspective it will be decades before it makes a difference.
Now I live in a state with a dumb mortgage recording tax so it's not easy to refinance
Great info - thank you! This is Washington state...not sure about the mortgage tax.
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