Looking to Move? Down Payment Funding

Many young adults face the challenge of moving from their "starter" home to the next home. Buying, selling, and moving between homes is no small task. It can be even more complicated if you do not have enough cash savings tucked away to make a down payment on the next home before selling your current home.

First, let's focus on the decision between contingency offers and short-term financing.

Home Sale Contingency Offer

Contingencies are protective clauses commonly used in real estate transactions for inspections and appraisals. But you can also use a home sale contingency, meaning you make an offer to buy the new house contingent upon selling your current home. As a buyer, a contingency offer can be your cheapest route if everything works out.

You can use the net proceeds from your home sale to fund the down payment on the new home. This avoids the need for additional loans or short-term financing. You also avoid the risk of paying multiple mortgages and additional interest if your home doesn't sell quickly.

The downside is that your buy offer becomes less attractive from the seller's perspective. The home sale contingency adds risk for the seller since they have no control over whether your current home sells quickly, or at all. If the seller receives other offers without those strings attached, they will likely pass on yours. If your contingent offer is accepted, you'll likely need to act quickly when selling your current home if there is a time specified in the agreement. The seller can back out if your home doesn't sell within that period.

Short Term Financing

A bridge loan is paid as a lump sum using your existing home equity and is intended to be repaid upon selling your current home. The bridge loan helps you become more attractive as a buyer since you have cash ready for a down payment and won't need to add a home sale contingency.

However, this added attractiveness comes with a price. You can expect to pay closing costs on the bridge loan with higher interest rates than a typical 30-year fixed mortgage. Also, be prepared to make monthly payments on the home equity loan in addition to your current mortgage payment.

Another short-term financing option is a Home Equity Line of Credit (HELOC). A HELOC is a revolving credit line that allows you to draw cash from existing equity on your current home. HELOCs typically come with variable interest rates, but you can typically avoid closing costs when drawing from a HELOC.

There may be early repayment penalties, so be sure you know the terms. A HELOC can be a great low-cost option, but the downside is availability. Banks typically won't provide a new HELOC if they know your home is going to be sold in the near future. Therefore, the HELOC is likely only an option if you already have one.

If you are working through a home-buying situation, let us help determine your best option.

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