Buying new home before old home sells
I am moving about 60 miles north of my present home. I need
to sell my home but with the market in the county where I live, I am afraid it
will not sell fast. I want to buy a home in the new area and get settled.
am thinking about doing a 5/1 ARM on the new house while the other house is for
sale. I have about $25,000 equity in the old house to put on the new house when
it does sell. I could immediately refinance the new one when I get my equity out
of the sale and go with a fixed-rate mortgage. Do you think this is a good or
-- Kathy Coordinate
Closing on a new first mortgage is an expensive proposition.
According to Bankrate's 2006 national survey of closing
costs, you could spend an additional $2,000 to $4,000 on that second closing,
money much better spent elsewhere.
Your eagerness to refinance after the sale of your former
home will depend on what interest rates you can currently qualify
for in financing the second home and where rates are when you sell
your former home, but I don't like the 5/1 ARM option you suggest.
According to Bankrate's Bankrate.com's Feb. 7, 2007,
national survey of mortgage rates, the difference in interest
expense between a 5/1 ARM and a 30-year fixed rate mortgage is just
0.14 percent. While you're not likely to get these rates when
financing a second home, the example below shows you that there's
not a huge difference in interest expense over the first year, and
most of the difference in payments is going toward paying down principal.
You can use Bankrate's mortgage payment calculator
to come up with a table that shows the specifics of your situation. If
you can afford the extra payment associated with the fixed-rate
mortgage, you've avoided the interest rate risk of the 5/1 ARM.
|Difference in interest expense |
amount:||$ 165,000 ||$ 165,000
|Monthly payment:||$ 1,022
| || || || |
|One year of payments:||$ 12,269
|Total interest expense:||$ 10,357
|Loan balance after 1 year:||$ 163,088
And while I'll be the first to tell you that I don't
know where mortgage rates are headed, there's a lot more risk to
the upside (higher rates) than potential for much lower fixed-rate
mortgages after you sell your current home.
Depending on your credit history, the purchase
price of the new house and the expected selling price of the old house, I think
the first line of attack is to investigate a piggyback loan on the new property.
loan has a first mortgage with a loan-to-value ratio of 80 percent
or less, so there's no private mortgage insurance, or PMI, requirement
on the property. The second mortgage can be for up to 20 percent
of the home's value, depending on how much money you can put down
prior to the sale of your home. This second mortgage can be
a home equity loan or a home equity line of credit, also known as
HELOC. You need to be aware of any prepayment penalties on
these mortgages if you plan on paying down the mortgage balance
with the proceeds from the sale of your former home.The condition and pricing of your old home, along with location, are key factors
in how long the home will be on the market. While I'm not suggesting that
you underprice your home to sell immediately, you are certainly a motivated seller
and it's an expensive proposition to price the home at a level where it will sit
and stagnate as a listing.
A bridge loan is another alternative. The closing costs associated
with a bridge loan can rival that of a first mortgage. The
loan typically comes due in six months but may have an option to
extend the loan for another six months. The Bankrate feature,
and cons of a bridge loan," explains bridge financing in
To state the obvious,
the key in minimizing the interest and other expense is to minimize the time that
you own two homes. Holding out for an extra $5,000 in the sales price of
your old home can cost you $5,000 in interest, property taxes, insurance, etc.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."