[ad_1]
Dear Big Move,
We are a recently retired couple in our early 60s.
Our current home used to be our second home, but it became our primary residence after we retired and sold our previous home. We really like our current home, but we are planning on moving to another location and buying our final house within the next few years.
The house we live in is worth about $920,000 and fully paid off. Our plan is to buy a house in a similar price range.
However, we would like to buy a house before we sell our current home, which may require us to get a bridge loan. Our expectation is to sell our house within six to nine months of the purchase. What’s the best option for short-term financing?
We have financial capacity to buy in cash, but it puts some constraint on our portfolio management by forcing us to hold a significant amount of cash for some time.
We could get a mortgage loan for the purchase and prepay when we sell our house. But we are not sure how easy it would be for us to get a mortgage with a reasonable rate, especially since we are not planning on receiving Social Security until 71, and our income (other than income from financial assets) is limited to some pension income.
Would a home-equity line of credit or a home-equity loan be a better option?
Retired Homeowner‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage. Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Retired,
One of the nice things about your situation is that you are debt-free.
You are free from this lock-in effect of having an ultra-low mortgage rate and feeling like you can’t give it up, something that many others are struggling with.
Lets go over the basics — that is, the difference between a home-equity line of credit (HELOC) and a home-equity loan (HEL), before trying to decide which is a better fit.
A HELOC is a type of revolving credit, much like a credit card. It’s a mortgage that allows you to borrow money against the equity in your home. You use the equity to pay for whatever you need — in this case, another house — during the draw period. You make interest payments during this period on whatever you borrow. And when that period ends, you’ll begin repaying the debt, principal and remaining interest.
One of the drawbacks of a HELOC is that the rates are variable. Which means that when mortgage rates go up or down, your payments will change along with it. But the good news is that mortgage rates are poised to drop over the coming months.
A HEL is slightly more straightforward. Such loans, also considered to be second mortgages, offer a lump sum to you upfront. Your home will be used as collateral. The interest rate on the mortgage is fixed, and you can borrow money against the equity in your home.
The best option — HELOC or HEL?
And for you? The better choice would likely be a HELOC, said Anthony Deal, a Charlotte, N.C.-based senior mortgage consultant at Loan Pronto. “For short-term financing, [you] would only have to pay interest on the loan between the time of purchase and the time of payoff,” Deal explained.
People who have paid off their first mortgage cannot take out HELs in most cases because they are designed to be a second mortgage, Deal said. Given that you don’t have a primary mortgage, the HEL becomes the first mortgage against your property. So if you fall behind on your payments, you risk losing the house.
One piece of advice when you pursue both options with the help of a financial adviser: shop around. Don’t settle for the rate one lender gives you. Keep your options open. The more rates you compare, the more you will potentially save. Getting at least four quotes from lenders could save borrowers over $1,200 on an annual basis, according to one study by Freddie Mac.
“There is some credit-score risk when applying for several mortgages in a short span,” Freddie Mac said, “but ultimately a borrower must decide if those risks outweigh the savings from lower payments.” You are in a privileged position with a $900,000 home paid off and your finances appear secure, so hopefully whatever choice you make will be the right one.
By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
[ad_2]
Source link
