Buying a second home before selling the first is a scary proposition. But some move-up buyers living in tight real estate markets have little choice if they want to land their dream home in their desired neighbourhood.It’s a seller’s market in areas such as the metro Boston area, Texas and northern California, where homes are receiving multiple offers.
If you think this optionis a luxury you can’t afford, you’re wrong. If you have a low ratio of debt to income, there are surprising things you can do to prepare before taking the plunge.
With record-low interest rates, it’s a great time to take advantage of buying more house for less.
Here are nine savvy ways to prepare before you venture into the land of double mortgages:
1. Get preapproved. This seems a no-brainer, but some buyers aren’t preapproved by their lender before they start house shopping, said Joe Parsons, a senior loan officer at PFS Funding in Dublin, Calif. This stamp of approval is essential for buyers to understand how much they can borrow for the new place and how much cash they need to close while still owning their first home.
2. Take out a home equity line of credit. You can’t borrow money to buy real estate unless it’s secured against another asset, so why not borrow from your home? If you’re planning to move, now is a good time to think about a home equity loan. Interest is deductible, and when you’re ready, the cash can be used toward a down payment on your new home, said Amy Tierce, a regional vice president at Fairway Independent Mortgage in Needham, Mass. Some caveats: Most lenders don’t like to hear you’ll be using it for another home, so keep that to yourself. If you pay it off within a year there will likely be penalties up to $500. You have to pay this money back, so don’t borrow more than you need.
3. Check into a blanket or cross-collateralization loan. This option isn’t available in all parts of the country and tends to be more popular with smaller chartered or community banks. These loans cover two or more pieces of real estate. The lender will place liens against both homes and release the lien against the first home once it’s sold.
[InvestingAnswers Feature: Mortgage Calculator for Fixed-Rate Mortgages]
4. Borrow against a 401(k) plan. You can typically borrow up to half of your balance, with no penalties, and don’t have to repay it for years (unless you get fired or quit your job).
5. Don’t plan on taking out another FHA loan. Federal Housing Administration loans have become more restrictive and expensive. They are the loan program of last resort for people who might not qualify for other loans. Tierce said if you already have one, you won’t be allowed to have two.
6. Plan for a smaller down payment. Conventional loans don’t require a 20% down payment. Low interest rates could make a 5% payment more palatable. This also provides a cushion if the house you’re buying appraises for less than the sale price, a common occurrence when multiple bids ensue.
[InvestingAnswers Feature: 5 Secrets to Surviving the Mortgage Process]
7. Consider a second mortgage. Second mortgages garner nearly double the interest rates (about 6.5%) as first mortgages, but they’re still cheaper than a credit card. You could plan to pay off this mortgage from sale proceeds of the first home or take the tax deduction and invest the money elsewhere.
8. Forget the contingency. These days, few sellers will agree to sell their home based on the sale of your home. Don’t even ask.
9. Go rental. If your house doesn’t have the fancy upgrades that draw multiple offers or the market is soft in your area, consider renting it for a few months until you can sell. The income will cover the mortgage and you can still deduct the interest on your taxes.
Double home ownership isn’t for everyone, but with the right plan and some savings you could be moving into your dream home sooner than you think.
The Investing Answer: Before making an offer on your dream home, talk to your lender to see if you can afford two mortgages. Stash at least six months of cash reserves in case your home doesn’t sell right away. Don’t buy more house than you can afford.
Karen Nielsen knows something about double mortgages. She currently owns two homes, but her North Texas home has received multiple offers and she hopes to put an end to that soon.
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