Home owners buy their second or third homes for a variety of reasons. They may be trading up to get more space and amenities; they may be downsizing, because they don't need as much space and want to cut expenses; they may want to relocate to get closer to their place of employment or their children, or to enjoy a more attractive climate.
Whatever the reasons for the move, many face the same challenge: how to use the equity in their existing house to purchase the new one before completing the sale of the old one. Selling the old one first avoids this problem but requires two moves, which is a major expense and a hassle.
This article considers four ways to change houses with only a single move:
- Borrow against your 401K account.
- Take an unsecured bridge loan from your bank
- Take a HELOC.
- Take a secured bridge loan from the lender financing your new purchase.
Borrow Against 401K Account
If you have a 401K retirement account and your employer permits loans against it for the purpose of buying a house, which most do, this is a low-cost and usually a low-risk way to finance the home purchase before selling the existing house.
The cost is the earnings foregone on the amount you borrow, which is no longer earning a return. The risk is that if you lose your job, or change employers, you must pay back the loan in full within a short period, often 60 days. If you don't, it is treated as a withdrawal and subjected to taxes and penalties. While 401K accounts can usually be rolled over into 401K accounts at a new employer, or into an IRA, without triggering tax payments or penalties, loans from a 401K cannot be rolled over.
Unsecured Bridge Loans
A bridge loan is one that is used to provide funds needed for a short period until another source of funds becomes available. In the home loan market, a bridge loan, sometimes called a "swing" loan, allows a home buyer to close on the new home purchase before closing on the old home sale. But a bridge loan will not be available unless you have a binding contract of sale on the old house. The sale agreement is the lender's security.
I used an unsecured bridge loan on my last purchase, and it was relatively simple and hassle-free. While the rate may be high, the interest payment won't amount to much because the period covered by the loan is short.
Banks aren't crazy about bridge loans because they realize they are one-shot affairs and they are unlikely to see the borrower again. For this reason, you should go to the institution where you currently hold your household deposit, and let them know (in a polite way) that as a customer, you expect this service.
If you don't have a binding contract of sale, you can't get an unsecured bridge loan, but if the house is not yet listed you can probably get a home equity line of credit or HELOC. With a HELOC, you can draw the amount you need to close on the new house, subject to a maximum draw.
If your old house is listed for sale, however, a HELOC may not be available. Lenders are not much interested in a deal that will last only a few months. If they go ahead on a home that is listed for sale, there likely will be a cancellation charge, and you may have to pay closing costs that they ordinarily waive to attract new customers.
Secured Bridge Loan
If all else fails, the lender financing the purchase of the new house might be willing to provide a secured bridge loan on the old house. Some lenders will do this as a marketing inducement. "If you take your purchase loan from us, you won't have to worry about whether your old home sells before the new one is purchased." The downside of this is that the purchase loan is very likely to be over-priced.
For more information on the using money in a 401K to buy a house, read my article Using Funds in a 401K for a Down Payment