3 Potential Solutions for Managing Two Mortgages
If you’re planning to buy a new home and sell your current one, your strategy might involve using the equity in your existing home to help finance the new purchase. Here are three options that may allow you to balance both properties while keeping financing manageable.
1. Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) allows you to borrow against the equity in your current home, which can be particularly useful if you need funds for a down payment on a new property. HELOCs work like credit lines, letting you draw funds as needed up to your available limit.
Important: You need to secure a HELOC before listing your home for sale, as lenders are less likely to approve a HELOC on a property that’s already on the market.
2. Bridge Loan
A bridge loan can provide short-term financing to help you “bridge” the gap between buying a new home and selling your existing one. Typically, you can borrow up to 80% of your home’s current value, which could be used to pay off your first mortgage and contribute to a down payment on the new home.
Bridge loans are generally interest-only and come with a short repayment term, often one year or less. Keep in mind that bridge loans usually have higher interest rates than traditional mortgages, so they’re best used if you’re confident that your home will sell quickly.
3. Low-Down-Payment Mortgage
If saving for a down payment is challenging because most of your equity is tied up in your current home, a low-down-payment mortgage might be a solution. FHA and some conventional mortgage programs sometimes allow as little as 3-5% down, depending on your financial profile and credit score.
Once you sell your first home, you can use the proceeds to make a lump-sum payment on the new mortgage. Some lenders will allow you to “recast” your mortgage — meaning they’ll apply the lump-sum payment to reduce the principal and recalculate your monthly payments based on the lower balance. Recasting isn’t the same as refinancing; it typically involves a small fee, but it doesn’t require a full application or closing process. Note that FHA, VA, and USDA loans do not allow recasting, so this option is only available for conventional loans.
Weighing Your Options: Which Strategy is Best for You?
Each of these strategies comes with its own risks and costs, so it’s important to carefully consider what works best for your situation. If you’re uncertain, talk to a mortgage professional or financial advisor who can help you navigate the options and choose the best solution based on your financial goals and timeline.
For many Midwestern homebuyers, the decision to buy a second home before selling the first one can depend heavily on the local real estate market. Consider the typical time it takes to sell a home in your area and factor that into your financial planning. Buying a new home before selling the old one can be risky, but with careful planning and the right financing tools, it can be manageable.