 |
Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Bridging the gap between houses
Dear Dr. Don,
We recently moved from Atlanta, Ga., to Austin,
Texas. We have a house on the market in Atlanta and are renting an
apartment in Austin, but would like to get into a house. We were waiting
for the house to sell so that we would have the cash for a down payment,
but it hasn't sold as quickly as we would like and our lease will
be up soon.
Someone mentioned to us the possibility of a piggyback
loan to buy the house here, and we could use the proceeds of the
sale to pay off the piggyback portion. Is this advisable? What should
we look for? Are there other better options, or would it be best
to just be patient and wait for our house to sell?
Bill Bifurcate
Dear Bill,
A piggyback loan is an 80-10-10, or similarly structured, mortgage
where the first mortgage is an 80 percent loan-to-value, a second
mortgage is issued concurrently for 10 percent and the buyer puts
10 percent down. The percentages can vary somewhat but, since the
goal is to avoid private mortgage insurance, the first mortgage
is at a loan-to-value where the lender doesn't require PMI.
As you move from some equity to no equity, the second
mortgage lender takes on additional risk. More risk means a higher
interest rate. You may be able to piggyback on an 80-20-0 basis,
but you'll have to shop hard to find a lender willing to take that
risk.
Another option is to take out a home equity loan on
the property in Atlanta. When you sell the home in Atlanta, the
home equity loan will be paid from the proceeds of the home sale.
That assumes that you have enough equity in the Atlanta property
to pay off the first and second mortgages, as well as any real estate
commission. Make sure you review the home equity loan documents
to see if there is a prepayment penalty associated with the home
equity loan.
Finally, you could look at a bridge loan. Bankrate's
mortgage glossary defines a bridge loan as "a loan that 'bridges'
the gap between the purchase of a new home and the sale of the borrower's
current home. The borrower's current home is used as collateral
and the money is used to close on the new home before the current
home is sold. Some are structured so they completely pay off the
old home's first mortgage at the bridge loan's closing, while others
pile the new debt on top of the old. They usually run for a term
of six months."
Which option to choose? Choose the one that minimizes your expected
interest expense, closing costs and prepayment penalties while giving
you some measure of flexibility if the Atlanta home doesn't sell
as quickly as you'd hope. Most bridge loans can be renewed at least
once if the house doesn't sell in the initial six-month term. Don't
accept a bridge loan that doesn't have a renewal provision.
-- Posted: April 23, 2004
|
