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I'm in a position where my wife and I are looking to purchase a new primary residence in a neighboring county. We're looking in the 550K range. Our current home is worth approximately 415K and we owe 200K on the mortgage. I don't want to list our current house for sale until we find the one we want to buy. The finance people say this is not a problem because we can list our current house as a rental property and still have a noncontingent contract. In this situation, I think I would do an 80/20 mortgage on the new house, and pay the 20 off when we sell our current house. They did say we will need to have sufficient cash available to pay for the closing as well as to possibly cover both mortgages for a few months. Our goal is to push the closing date on the new house as far in the future as possible, and then list our current house for sale. This would give us a chance of selling before we have to buy the new house. In the event we don't sell before the new home closing, we have about 12K in liquid funds, but the forecasted closing costs are to be around 16K. Their recommended course of action is to get a home equity line of credit (HELOC) on our current house before we list it because this will be the cheapest way to get money. They estimated it would cost around $500 for a 30-40K line, and of course you don't have to make payments until you withdraw money. If we do this, we're covered for any closing and double mortgage payments we might have to make, but if we do manage to sell our current house before closing, then we won't have to use the HELOC at all, and we'll only be out $500. Does this sound like a good course of action? Or should I get a HELOC for $120K to cover closing and 20% of the new home so that I don't have to get a second mortgage for the 20%? They forecasted that going the 80/20 route would cost us roughly $3500 additional over a single loan.

Second, I'm faced with the problem of conventional versus a jumbo loan. We're looking at 30 year fixed rates because this is the house we'll want to stay in for a long while. We stand to make about 200K from the sale of our current home. Is it wiser to roll all of the money into the new home to try and get our mortgage at the conventional loan rate (conventional loans have slightly lower interest rates then jumbo)? Or is it better to only put 20% down, and invest the remaining balance? We are thinking of having kids, so it wouldn't hurt to have that cash cushion.

Any input would be valuable.

Thanks!

Member Summary
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Gtreat, thanks. I guess I need to look more into this HELOC option. <br><br>So, the HELOC line needs to be open before t... (more)

v1rok (Aug. 31, 2005 @ 5:06p) |

HELOCs- your rates are going up. The fed anounced that they are going to take a "neutral" policy. They determine "neutra... (more)

pcffund (Sep. 22, 2005 @ 4:59p) |

pcffund, with good credit you can get HELOCs at Prime - .25% or even Prime - 1%. And closing costs on a bridge loan are... (more)

davelanton (Sep. 23, 2005 @ 5:31p) |

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buying new place before sale on mine

A couple of observations though. It is a good idea to get the HELOC in place now, before any lender gets wind of your sale and purchase plans. They don't like to hear that you are using the proceeds to fund acquisition of a new property because that means you won't be keeping the HELOC very long.

Now, if you are definately putting this house on the market within the year, don't get the HELOC for the $30-$40k. Get a first position HELOC for the maximum amount your home value will support (around $325k) and PAY OFF YOUR FIRST MORTGAGE. Get the HELOC with the lowest and longest lasting teaser rate you can find, zero closing costs, and the lowest "early closing" fee you can find. For comparison, I did this with a $500k HELOC last year and I paid zero closing costs, 1.75% interest for three months, prime minus a quarter thereafter, and a $350 early termination fee.

Now, what does this do for you? First, you will save a ton of interest expense on your current mortgage because the teaser rate on your HELOC is going to be lower than your current mortgage. You can bear the risk of the floating rate HELOC because you are only going to have the loan for a short time. Second, you now have more than $100k in easily accessible funds for a down payment on a new property. Third, your minimum payment on the HELOC balance is going to be much lower than your existing amortizing loan, so you can more easily qualify for both the existing home loan and the new home loan at the same time, reducing the stress of having to carry both first mortgages in the event that yours doesn't sell rapidly.

As for carrying a bigger mortgage than you need so you can redeploy the equity elsewhere, I'm all for that, but you can read that in this thread.

Likewise, my new house will be closing in one month.
However, my current house is still on the market. What to do? Well, I'm planning to get a no-closing jumbo loan with the lowest interest rate (most likely a 1/1 arm, possibly 3/1) thinking my house should sell in that time frame and then do a ReFi.

I did anticipate dipping into my equity for emergency funds so I increased my HELOC earlier this year (also approx. $500 to process the increase).


The line of credit will give you more breathing room for the move.

Check local banks for the line of credit. Mortgage brokers don't have good deals on lines of credit.
Bank of America has a line of credit with no fees ever.
Most other banks will not charge you a closing fee if you sell your house.

Even with the line of credit in place, I would play whatever games your realtor suggests to delay borrowing against the line of credit.


waterman said: [Q]Most other banks will not charge you a closing fee if you sell your house.This was not my experience when researching HELOC's last year. Terms varied, some charging you a fee if you closed within one year, others if you closed within three years. Most did not charge a closing fee if the line had been open for more than three years.

I'm not sure if I understand your terminology, but by 80/20 do you mean that you would have an 80% loan and a separate 20% loan (i.e. 100% financed). Essentially, no money down? Are you sure that your lender will let you carry your current $200K mortgage and this new $550K mortgage as well?

It may make more sense to do a HELOC on your current home to cover the 20% down payment for the new house. If you really want to move, put your house on the market now. You can ask your realtor/lawyer to add "contingent on seller's firm relocation" in the contract. This gives you an out if you don't end up getting the house you want.

20% down (from your HELOC) plus a signed contract on your house will put you in a much better negotiating position as a buyer.

Good luck...

McDealio, yes you're correct on your interpretation of 80/20. Our finance guy said there should be no problem getting 100% financing, but I'm beginning to think that it would be a better move to get a HELOC large enough to at least cover the 20% so I don't have to fool with a 2nd mortgage. Whether or not I should also pay off my existing mortgage is something that I need to look into (Thanks dcwilbur).

Very timely topic... I am considering doing the same thing in the next 6 months: buying new house first, then selling my current house.

The HELOC option is an interesting idea. So, here is my situation. My current house is worth about $600K of which I own $200K to the bank. So this means I have about $400K in equity. We would like to buy a new house in the $900-$1mln price range. Ideally, I would like to apply all of my equity in the current house ($400K) to the new mortgage, but as I said we want to buy first and sell later. Would HELOC option work for me? How much can I draw from HELOC? Can I apply for and get all $400K at once? Wouldn't applying for such a big HELOC line affect our credit scores? If so, by how much? Finally, wouldn't a lender be considering all three loans ($200K Old Mortgage + $400K HELOC + $500K new mortgage) when qualifying us for the new mortgage? If that's the case I am afraid our debt-to-income ratio would go over the allowable limit. Or are lenders "flexible" in these situations?



Great topic. I was gonna start one... but I risked getting flamed. <img src="i/expressions/face-icon-small-happy.gif" border=0>


Here is another question for the "financially wise"

I have a co-op... and have about 100k in equity. Looking to buy a new house for 400k. I was going to do an 80/10/10 loan.

I have two ways to pursue this:

Option A: Tap into my 401k very temporarily (loan)... and pull out 35k. Fees for this will be very minimal ($50 application fee... very little interest since loan will be paid back ASAP... i can still contribute normally while I have a loan out... no withdrawal penalties since I wont be withdrawing... i would be taking a loan). Once I buy the new house... I close on my co-op and pay 401k back.

Option B: Take out HELOC on my co-op. Fee is $450 from lender... and $550 from my co-op. $1000 total. Use money from HELOC to pay 10% DP on new house. Pay off second mortgage 10% after co-op closes.


Which do you guys prefer? I was all set to do Option A.. since a 401k loan at my job is a piece of cake to get with no issues. But somebody told me I will pay a LOT MORE closing costs on an 80/10/10 loan compared to a conventional loan putting 20% down in liquid funds.


MrBNatural said: [Q]McDealio, yes you're correct on your interpretation of 80/20. Our finance guy said there should be no problem getting 100% financing, but I'm beginning to think that it would be a better move to get a HELOC large enough to at least cover the 20% so I don't have to fool with a 2nd mortgage. Whether or not I should also pay off my existing mortgage is something that I need to look into (Thanks dcwilbur).


Will you pay significantly more closing costs with this type of loan 100% financing? Over conventional 20% down?

And if so... what exactly is more expensive (tax stamps? 800s? 1000s?)


I've purchased my last two homes this way.

Take out a HELOC with the maximum amount your old house will support. Many places will go to 90-95% of LTV. PENFED is excellent -- no fees, no closing costs, no cost to cancel etc. They'll let you take out 90%. Do this now before you put your house on the market. No lender will give you a HELOC when your house is for sale.

If the place you're going to buy is near the conventional / jumbo cap take out a convential. It will save you quite a bit of interest. So take out a 79 / 11 etc loan to keep under the jumbo rates. On my last house we were way over the convential limit so we just did 80/10/10.

Take your heloc and put down the 10% out of it on your purchase.

After you sell your old house take the proceeds and either pay off the second mortgage (what I did) or put that in the bank.

I went PENFED all the way since they don't charge any fees for opening or closing HELOCs.

trs23 said: [Q]I've purchased my last two homes this way.

After you sell your old house take the proceeds and either pay off the second mortgage (what I did) or put that in the bank.

I went PENFED all the way since they don't charge any fees for opening or closing HELOCs.


Are there additional closing costs if you do 80/10/10 as compared to straight up 20% down?

My HELOC availability is very borderline... that I may be able to pull out enough to put 20% down outright.

If I can't do that (put 20% down)... I would rather pull from my 401k cause I get fees up the wazoo for HELOC'ing a co-op and my 401k will give me enough cash to put 10% down.

Djpill,
Based on the good faith estimates from my lender, it would cost an additional $3500 for the 2nd mortgage at 20%. That's substantial compared to the costs for a HELOC, so I'm thinking that's my best option.

MrBNatural said: [Q]Djpill,
Based on the good faith estimates from my lender, it would cost an additional $3500 for the 2nd mortgage at 20%. That's substantial compared to the costs for a HELOC, so I'm thinking that's my best option.


Thats strange. Take a look at this GFE I got from Chase.

Closing Costs

Now this isn't the actual GFE. This was for an 80/10/10 loan. It doesn't list any additional costs for the 2nd mortgage... but in the bottom left it said "Easy 2nd Mortgage Payment" and it lists the payment for the 2nd mortgage.

What about buying the second home with bridge financing until the first home sells?

Interesting. I looked again at the GFE, and the $3300 (that's the exact #) is showing up as a loan discount, which is 3/4 of a point on the 80% loan. Is it normal to have to pay points on a 2nd mortgage? I'm wondering about this finance person. My realtor who I've used before and trust, swears by him.

Several of you have mentioned significant closing costs for a HELOC. You are dealing with the wrong lenders. There are many out there who will give you a HELOC for nothing. Just watch the early termination fees.

dcwilbur said: [Q] Just watch the early termination fees.


Thats the point. All of us looking to do this WILL be terminating early. Thats the whole point... to get cash to buy something else.

Chase charges $450 to terminate early (within 3 years of opening).

Plus my co-op hits me up for a $550 fee for this. <img src="i/expressions/face-icon-small-sad.gif" border=0> That fee is inavoidable because they will not endorse the recognition agreements for the HELOC without getting their money.


DjPiLL said: [Q]dcwilbur said: [Q]Just watch the early termination fees.Thats the point. All of us looking to do this WILL be terminating early. Thats the whole point... to get cash to buy something else.

Chase charges $450 to terminate early (within 3 years of opening).

Plus my co-op hits me up for a $550 fee for this. <img src="i/expressions/face-icon-small-sad.gif" border=0> That fee is inavoidable because they will not endorse the recognition agreements for the HELOC without getting their money.I know that's the point (I'm the one who outlined this strategy above), but it wasn't clear from your post that you were talking about an early termination fee. BTW - E*Trade only charges $350.

dcwilbur said: [Q]I know that's the point (I'm the one who outlined this strategy above), but it wasn't clear from your post that you were talking about an early termination fee. BTW - E*Trade only charges $350.


No problem. I just take it on both ends cause I currently have a co-op. Great investment... made a nice profit so far. Just fees up the wazoo for stuff like this.


Penfed has no early termination fees.

I did get hit with some extra title company charges for the 10% second (HELOC) on the new house, but they weren't huge. < $200 and now I have a 10% HELOC on my new house that is untapped! (I paid it off with the proceeds from the sale of the old house.)

MrBNatural said: [Q] we have about 12K in liquid funds

Are you calling these funds "liquid" because that's what you have in cash, or are you actually using the generally accepted meaning of the term: cash or those assets that can quickly be converted to cash without significant market loss.

If the former, maybe you ought to change your investment mix ahead of big decisions. If the latter, you have fundamental financial problems.

Want to bring back my question about the debt-to-income qualification with the HELOC option. Wouldn't a lender consider all three loans (Old Mortgage + HELOC + New mortgage) when underwriting for the new mortgage? I believe the standard d2i ratios are 28% to 33%. With the three mortgages open at the same time, I can easily see us going over the limit. (But only for a couple of months.) Or are lender flexible and don't usually consider old mortgage payments in d2i?

The debt to income ratio issue is why my lender wanted to call our current house a rental property. I guess that makes a difference.

v1rok said: [Q]Want to bring back my question about the debt-to-income qualification with the HELOC option. Wouldn't a lender consider all three loans (Old Mortgage + HELOC + New mortgage) when underwriting for the new mortgage? I believe the standard d2i ratios are 28% to 33%. With the three mortgages open at the same time, I can easily see us going over the limit. (But only for a couple of months.) Or are lender flexible and don't usually consider old mortgage payments in d2i?This is one of the reasons I used the HELOC to pay off the existing first mortgage. Debt service on the large HELOC was much lower than on the first mortgage. Re-read my post above.

Gtreat, thanks. I guess I need to look more into this HELOC option.

So, the HELOC line needs to be open before the current house goes on sale. This makes sense. But probably not too soon, because with house prices still rising across the board if you wait 2-3 months you can potentially get more (because the house will be valued more in 2-3 month.)

Does it matter if I open HELOC with the same bank as my mortgage (Bank of America, in my case.) Or will it add more problems during closing because they will see all the accounts in their system and not just from credit reports?

What to give as justification on HELOC application? I guess, home improvement? In some sort it is "home improvement" - moving from the current house to a better house. Or do they ask for specifics (what kind of home improvement, what is estimated time of comepletion, etc.)?


HELOCs- your rates are going up. The fed anounced that they are going to take a "neutral" policy. They determine "neutral" by adding the CRI (core rate of inflation) which is 2.5% + 1.5%. The fed funds rate is currently at 3.75%, so that means it is headed to 4%, maybe 4.25% because inflation is a moving target. So your line of credit will be going up 1/2 point soon. The line of credit is based on the Prime rate. The prime rate is determined by adding the fed funds rate + 3, it is currently at 6.75%. Most lines of credit are at 1 - 1.5% over prime. So soon your line of credit will be 7.75% - 8%.
Might be a good time to think about getting into a fixed rate, or even an interest only loan.
Also, the banks do allow you to sell your house and use the proceeds to buy a new house. You can do this by either timing it right, or get a bridge loan. A bridge loan,or one type of bridge loan simply put, is a short term loan, where the bank will give you a loan based on the fact that you are selling your current home and buying a new one. So the bank knows that you'll be paying it off after you sell you house.
Regarding putting money down..I bought my house for no money. It was an 80/20 with a 6% seller concession. A seller concession is what aid for my closing costs. I had money to put down, but cash in hand is usually better and also the fact that i would be writing off less at the end of the year b/c of a smaller mortgage payment.

pcffund, with good credit you can get HELOCs at Prime - .25% or even Prime - 1%. And closing costs on a bridge loan are substantial. Using a no-fee HELOC, even with rates ticking up, is a far better option.

Nexity Bank offers a HELOC at Prime - .25%, with 1% intro rate for 3 months. Their termination fee is waived if you sell your property, so this is PERFECT for this purpose.




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