Purchasing Your Next Home

Advice for Buying your Next home

Buying your next home can be a daunting process, as you are often dealing with the sale  of your current home at the same time. For example, if the closing dates on the two homes don’t match, you will be faced with expensive financing costs. However, if you follow some basic rules, you can navigate through the process smoothly, avoiding many of the common and costly errors that are made.

The first thing to do is get pre-approved for the new mortgage. Getting pre-qualified will tell you exactly how much you can spend on your new home. This can make you more attractive to sellers, since your offer will not depend on you getting financing. Another advantage is that you can lock in at the current interest rate, so you won’t pay more if rates rise before you close on a home. Sometimes lenders will lock you into the current rate for the 30 days without charge, but there is usually a fee to lock in for three or six months.

To avoid financial problems, it is highly recommended that you sell your existing home before you close the purchase of your new home. This enables you to use the down payment on your current home toward the down payment on your new home.

You don’t need all the money to pay for your new home until closing day. When your offer is accepted, you will have to pay a deposit that is typically 1 to 5 percent of the selling price. You may also be required to pay some fees to the lender at this time, such as the mortgage application fee. Most of the rest of the money including your down payment and the rest of the purchase price will be paid at closing. This is why it is crucial that you close the deal on your current home first. 

If your current home closes after your new one, you will have to carry the mortgages on both homes until your old one closes. One answer is a bridge loan, which is a short-term loan using your current home as collateral. This can enable you to borrow up to 90 percent of the equity you have in the home. Unfortunately, this means you will typically be paying interest rates 1 to3 percent higher than the prime rate and might have to pay six months’ interest up-front.

Sometimes a home equity line of credit is a better option since the interest rate may be 1 percent lower than a bridge loan. In addition, there is no up-front interest payment, and your interest costs are lower since you draw the money only when you need it each month. Unfortunately, if you sell your home within a year of taking the line of credit, there could be a penalty and your home could be seized if you fail to repay.