Financing a New Home Purchase

[mitchjav]

Assuming that you want to buy a new home before selling your existing home
and don't want to take out a mortgage against the new home, how best to finance it. There's not enough cash available to do this and don't want to sell assets due to tax and other considerations. Is there some sort of bridge loan that one can get without getting a mortgage? Or is there a way to use a HELOC for this purchase? Talking about an overlap of about a month until the old home is sold.

Thanks, Mitch

 

[Walt34]

A "bridge loan" is exactly what it's called for that purpose and reason. Generally they have a higher interest rate because of the shorter term, but since it's only for a month or three no big deal.

 

[mitchjav]

A "bridge loan" is exactly what it's called for that purpose and reason. Generally they have a higher interest rate because of the shorter term, but since it's only for a month or three no big deal.

Understood, but I was under the impression that a bridge loan is hard (impossible?) to obtain unless your also taking out a mortgage with the bank providing the bridge loan?

 

[Walt34]

That I don't know, not having ever done it myself. I'm sure others more knowledgeable will be along shortly. There no shortage of such expertise on this forum.

 

[njhowie]

You may be able to use one of the P2P lending companies for this.

and don't want to take out a mortgage against the new home

Whether you want to call it a mortgage or not, that's what it is, unless you plan on offering something else for the collateral on the loan to secure it. If you don't plan to provide collateral, then you are looking at a higher interest rate.

Let me also suggest you consider that there is risk in doing this. What if your current home does not sell as quickly as you expect, or it doesn't sell? Can you handle monthly payments and property taxes on the new home and the old one simultaneously? Possibly for a year or longer? This is what happened to some friends of ours. They bought the new house and moved, they thought they had a buyer for the old home, but they decided to buy a different home in the same neighborhood. It's been on the market since - over a year ago.

 

[BigMoneyJim]

Bridge loans and HELOCs are a couple of ways. There are probably others. But it's high-cost and high-risk.

But wait, are you saying your current house is paid off, and your after-move scenario is that your old house is sold and your new one is paid off? Honestly it may be simpler to get a mortgage. Maybe even a balloon mortgage.

I was tempted in recent years (even last year) to temporarily own two homes at once with two mortgages to make moving easier. But I knew it was very risky, and I can say with absolute confidence I'm really glad I didn't/don't own two homes with two mortgages in 2020.

 

[catotx]

If you have investments at a brokerage firm, you can take a margin loan. This is what I used. I took a margin loan from Interactive Brokers to purchase my current home before selling the old house. IB has the lowest margin rates in the industry.

 

[COcheesehead]

If it really is only a month, can’t you negotiate a longer close date? That’s what we did.

 

[RenoJay]

Private hard money lenders do bridge loans. I’ve personally done several for the exact situation described. But they’re pricey: the interest rate is likely to be ~8% and depending on the size of the loan you may end up paying 2 or more points, and there may be a minimum interest guarantee equal to 3-6 months’ interest . The best bet is to offer 6% to a relative who’s seeking yield and try to get a short term, no funny business loan that way. You can offer them a lien against the new home.

 

[travelover]

You can take the money out of a 401(k) or IRA and replace it within 60 days with no penalties or taxes. LINK

 

[RunningBum]

You can take the money out of a 401(k) or IRA and replace it within 60 days with no penalties or taxes. LINK

Yeah, but if the sale falls through, then you're in trouble.

I'd probably do the margin loan myself. I helped family with a bridge loan when some paperwork wasn't coming through, but it turned out not to be needed, and I either used margin, or I set up margin in case it was needed again. I could see it happening. I would make sure I was nowhere close to maxing it out, to avoid a margin call if the market dropped.

My other choice would be to use my Roth, or take out a HELOC.

 

[travelover]

Yeah, but if the sale falls through, then you're in trouble............

That is entirely up to the OP to decide. It is a viable option that no one else brought up.

 

[Sunset]

I would just sell the first house before closing on the 2nd one.

Heard too many stories of the sale of house 1 falling through, and then the person is carrying two houses.

 

[Bamaman]

If you have investments at a brokerage firm, you can take a margin loan. This is what I used. I took a margin loan from Interactive Brokers to purchase my current home before selling the old house. IB has the lowest margin rates in the industry.

Trouble is that so many folks' investments are tied up in IRA's and 401K's. Can you put them up as collateral on a loan?

I just went to my credit union and took out a loan on my paid for house. I then was in a better position on the new home to get a faster and better deal as a cash buyer.

Took me 5 months to move out of the old home, do minor recondtioning and closing with a new buyer.

 

[COcheesehead]

I would just sell the first house before closing on the 2nd one.

Heard too many stories of the sale of house 1 falling through, and then the person is carrying two houses.

+1

We've done just that twice. Lived the short term rental life between houses. It wasn't that bad. We had the money in the bank and actually saved money when you figured in no property taxes, HOA, etc.

On our most current sale, we were able to work with the buyer to get an extended closing date so that we only had to move once.

 

[kgtest]

If it really is only a month, can’t you negotiate a longer close date? That’s what we did.

I rented to the PO for a couple days to help them out on their other side of the close with new home. Just a thought.

 

[Montecfo]

Safest and cheapest option might be to get a low cost mortgage and then pay it off when everything is clear. I think you can get a "low fee" mortgage at Third Federal for $ 295 closing costs.

Similar deals probably available elsewhere. It mitigates all the other risks.

 

[mitchjav]

Thanks all for the feedback - will likely try to close on existing house first to avoid the issue altogether - but if that doesn't work out, sounds to me like a "low fee" mortgage is the lowest risk option as long as there's no pre-payment fee - would pay it back quickly.

 

[COcheesehead]

The “low cost” loans sound like a shell game to me. There’s no free lunch. Banks need to cover costs related to title work, appraisal, etc. I would be careful to find the hidden peanut.

 

[Rushmore]

Understood, but I was under the impression that a bridge loan is hard (impossible?) to obtain unless your also taking out a mortgage with the bank providing the bridge loan?

I haven’t had any trouble I haven’t had a mortgage for 20 years and have had several bridge loans

 

[Retired Expat]

Assuming that you want to buy a new home before selling your existing home
and don't want to take out a mortgage against the new home, how best to finance it. There's not enough cash available to do this and don't want to sell assets due to tax and other considerations. Is there some sort of bridge loan that one can get without getting a mortgage? Or is there a way to use a HELOC for this purchase? Talking about an overlap of about a month until the old home is sold.

Thanks, Mitch

Assuming you have an investment account with your retirement accounts? Your broker should be able to lend you money on the short term at very low rates with minimal fuss. What I did to avoid selling assets and b able to make an all cash offer for a better deal. Then after purchase took out a mortgage and paid off the bridge-loan.