real estate

Avoid falling into the dual-mortgage trap

Steve McLindenQuestionDear Real Estate Adviser,
We want buy a house in another city that's closer to our grandkids. Should we try to sell our house first? We could afford to pay two mortgages for a while, but with the uncertainty in the sales market, we are a little worried. What's the best way to handle this, typically?
-- Louis W.

AnswerDear Louis,
There are two distinctly different schools of thought here.

One says you should avoid giving up your present home because you may have to put everything in storage and move into less-than-satisfactory temporary digs if the purchase of your new home is delayed or falls apart for any reason. That could be a headache if you have pets and lots of furnishing and other belongings. The other school of thought says you should never commit to a new house before you sell the old one, especially if you have to use the equity from the old house to buy the new one.

In a perfect world, of course, you would have enough cash to carry both mortgages indefinitely and the coordination of the buy-sell maneuver wouldn't be an ordeal. But if you aren't in that position, especially given today's market realities, I'd lean toward cementing the sale of that existing home first if possible. Because it's a buyer's market, you stand to have far fewer problems executing the buy side of the equation these days because sellers tend to be more motivated -- and grateful -- that they have an offer.

If you do feel compelled to buy a place near your grandkids sooner than later, there are a few financing options that can mitigate the potential discomfort of carrying two mortgages. One is called a bridge loan, which gives you enough capital for a down payment on the new place and perhaps enough to pay your second mortgage for a while. In most cases, you wouldn't have to close on such a loan unless you needed it. A bridge loan, which is typically repaid when you sell the house, generally requires an appraisal. Plus, an origination fee will kick in when you start using the loan.

Or you could take out a home equity line of credit, or HELOC, to use toward the down payment and closing expenses, although some lenders frown on this if you've already put your present home on the market. Arrange for your HELOC in advance of sales activity, but commit to leaving that credit line alone until it's needed. Financing and terms will depend largely on your income, of course.

There are some contractual strategies that might help you avoid falling into the dual-mortgage chasm as well. You could add a "sale of buyer's home contingency" to your sales contract, sometimes called a "Hubbard" in industry lexicon. That allows you a stipulated period, typically two to three months, to sell your current home before you have to close on the new one. There's also a "reverse Hubbard" that allows the seller a set period of time to find a replacement home after accepting a purchase offer. Both allow "outs" without repercussions with the proper contract language. The negative to the Hubbard is that other buyers can swoop in with no-contingency offers and grab the house you want, or in the case of the reverse Hubbard, they can drop your deal to buy another house that isn't saddled by such contingencies.

These days, at least in my opinion, the sale of the present house trumps the purchase of the new one in order of importance. Good luck.

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