When selling your home it is always best to make sure you have somewhere to live when your home sells. Sure, you might have plans to rent between selling your current home and buying your new home, but things can go wrong. Rental costs can easily eat into your deposit and cash for closing fees if there is any delay in closing your new mortgage.
There is the reverse argument of course. Occasionally, people will make an offer for a new home and then find they cannot sell their old property. It could then be argued that you should sell first and buy later. With these two conflicting arguments, who should you listen to and what should you do when moving home?
Financial Issues in Moving Home
First of all, you are not unique. Most people that move face the same dilemma. The best answer depends a great deal upon your personal financial situation. The ideal situation would be for you not to require the equity in your current home to use as a deposit for the next. Then, once you have had your offer for the new property accepted, and are awaiting closing, you can begin to sell your existing property.
However, what if you were able to maintain the mortgage on both homes for a while, between closing the new mortgage and selling your old home, but could not pay the deposit and closing fees? The solution would be to take a home equity line of credit, otherwise known as a HELOC. This would give the cash you need to close out the new mortgage. You could then repay that after selling your old home.
HELOC or Bridge Loan?
There can be problems with this, in that a lender would generally be reluctant to lend money on a home that is currently up for sale. If you anticipate this problem, a better solution would be to arrange the HELOC before advertising your home – up to 6 months in advance. It might also be possible when you arrange your new purchase loan to ask your loan agent to include a HELOC.
The alternative is a bridge loan, specifically designed for your specific circumstance. This must be paid when you sell your home, or at least within the period of the short term loan. Check the interest rates involved in both these solutions before coming to a decision.
Buy First or Sell First?
There is no easy answer to the question whether you should buy first or sell first. Before moving home, you should first have tried to save for your down payment, and at least be able to afford two mortgages. If not, then you must sell first and perhaps rent until the mortgage loan on your new home as been closed.
A short term HELOC or bridge loan might enable you to buy first if you can afford the payments on two mortgages. If this is the case, then you can buy first, using the bridge loan or line of credit for your down payment and closing costs. If you are lucky, the sale of your old home might close after your new mortgage closes.
Moving should be an exciting period in your life, yet it is often a worry. It is best to be aware of potential issues before they arise, and to be ready with a solution if they do.