Trying to
simultaneously sell your home and buy another is a little like a hat trick:
ideally you want the money from the sale of your current house to be available
instantly as mortgage and closing funds for the new one, but too often a delay
leaves you empty-handed.
But unlike a hat trick, even if you can't close your sale and your purchase on
the same day, you can raise your odds of coming close. And if all else fails,
there are ways to bridge the interim without breaking the bank.
1. Sell before you buy. Selling first is always good advice for the financially
conservative-but it's particularly wise in a buyer's market, in which there are
more homes than qualified buyers. That way, if you have to lower your asking
price to attract a qualified buyer, you'll have a firm idea of what you can
afford. Conversely, in a seller's market (in which buyers are many but homes are
few), your home should sell more quickly and at a better price-but you'll also
pay more, amid more competition, when you buy. If the market is balanced, list
your home and begin a preliminary hunt for your new digs; then begin your search
in earnest as soon as you have a firm contract with a buyer.
2. Do a preliminary hunt. Begin an advance house hunt when you put your house on
the market. You'll get an idea of what's available in your price range, and a
chance to narrow down neighborhoods while you wait for buyer offers. But
consider it research; don't get serious until you're confident in your current
home's salability. You don't want to fall so in love with a house that you make
an offer that might be unaffordable. Once you're on firm footing with a
prospective buyer, start your hunt in earnest.
3. Buy on contingency. Sellers aren't crazy about contingency terms, but it's a
great option for buyers who have to sell one home to buy another. If your
purchase contract includes a prior-sale contingency, you're protected from
carrying two mortgages at once, since you can back out of your offer if your
home doesn't sell by an agreed-upon date. The seller will probably retain the
right to keep showing to other buyers until your home is sold, you withdraw your
contingency, or they receive another offer without a prior-sale contingency.
Bridging the
Interim
Selling and buying
houses is costly, especially if you're caught having to pay both mortgages for a
while. If there's a sizable time period between your house sale and house
purchase, you'll need a solid interim plan. Whether you'll be renting a home in
the interim or you need a down payment for a new house before yours has sold,
there are loans designed to help, as well as other interim options.
1. Leasing from your buyer. If there's a gap of some months between your sale
closing and your purchase closing, try to negotiate a lease-back with the buyers
of your house until your next house is bought and ready to move into.
2. Bridge loans. A short-term bridge loan, in which you basically borrow from
your current home's equity until you receive the proceeds from its sale, range
from one day to six months. With some bridge loans you pay only the
interest-expect to pay more than for a conventional loan. Others require a
single balloon payment of interest and principal when the loan comes due. You'll
also likely be charged points and other fees. Bridge loans can sometimes be
renewed, but because they're expensive, they're best used to manage overlaps of
a few days between closings, or at most a few months. Picture simultaneously
paying your old mortgage, your new mortgage, and a bridge loan of a similar
amount, and you'll see why real estate experts say that taking out a bridge loan
is like paying three mortgages. Another risk: they're secured with a lien on
your home, so failure to make payments can result in foreclosure.
Home-equity options
If you need to
borrow for a longer period, tapping into home equity is the best starting point
for many owners who have built up sizable equity in their home. Generally less
expensive than bridge loans, home-equity options are also often free of points
and fees and may have a lower interest rate.
1. Fixed-rate home equity loan. Fixed-rate home equity loans, in which you get
the full amount when the loan closes, are similar to primary loans in that you
make uniform payments over 10 to 30 years, and the loan is secured by your home.
This is a good option if you need a lump sum for a down payment or to renovate
your new house. Note that there are limitations to the amount you can borrow,
based in part on your debt-to-income ratio, and your property is vulnerable to
foreclosure.
2. Line of credit.
A home line of credit is an excellent, flexible option if you have an uncertain
expense-for example, if you're renting a home while waiting to move into
another. There's no requirement to use any of it-it's simply a guarantee that
the money is there if you need to write checks against it. Payments are often
interest-only for the loan's duration, and you pay interest only on the amount
you use. If you use nothing you lose nothing. Interest rates are generally one
to three points higher than the prime rate, but many banks offer a low rate for
the first six months to attract borrowers.
3. Renting in the interim. Moving into a rental and then doing it all over again
when your next house is ready is expensive and annoying-but it's cheaper than
paying two mortgages and possibly carrying a "third mortgage" in the
form of a bridge loan. It's also less pricey than rushing to buy a house you
won't be happy with. Just remember that to qualify for the IRS rollover
replacement rule, you must buy a house of equal or greater cost within 24 months
of selling your current house.
Remember Extra
Costs
As a homeowner,
you know that big bucks are part of buying a house; they're also part of selling
one. On the selling side, your highest cost will be the listing agent's fee,
typically about 6 percent of the selling price. Altogether, getting through
closing as a seller may cost as much as 10 percent of your selling price.
As a buyer who's upgrading, you'll have closing costs and probably higher costs
in insurance and property taxes. Fees, points, and other costs of closing will
likely total 2 to 7 percent of the purchase price. Calculated at midrange (4.5
percent), you're looking at adding an extra $13,500 to buy a $300,000 house.
(You'll also want to keep moving costs in mind.) Fortunately, some of these
expenses, including prepaid interest, can be deducted in the year you buy, and
eventually you'll benefit by a reduction in capital gains tax, as you can apply
most other costs to your home's cost basis.
Sally Anderson is a writer and editor based in Seattle.