Buying a New House Before Old One Closes

Q: I need to use the equity in my existing house to buy a new one, but it looks like I am going to have to close on my new house before I am able to close on my old one. How can I handle this?

A: I am assuming you have exhausted all possibilities of borrowing from family, friends or retirement accounts. The next best options are a swing loan from a bank or a home-equity loan on your current house.

If you have a contract of sale on your current house, many banks will make a “swing” or “bridge” loan for the period between the closing on your new house and the closing on your old house.

I used a swing 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 if the period is short.

Banks aren’t crazy about swing 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 deposit, whether it is a commercial bank, savings and loan association or credit union.

If they give you any flak, let them know (in a polite way) that as a customer, you expect this service, and if you don’t get it you have lots of other choices as to where you hold your account.

A home-equity loan is likely to be more costly than a swing loan, although the cost will be influenced greatly by the amount of equity you have in your current property, and on how astute you are in your shopping.

What you need to avoid are points (an upfront charge expressed as a percentage of the loan amount), other upfront fees and prepayment penalties.

Bear in mind that on a three-month loan, you can afford to pay an interest rate up to 4 percentage points higher to avoid paying a fee equal to 1% of the loan.

Don’t tell the loan officer any more than you need to about how you intend to use the loan.

Jack Guttentag is a syndicated columnist and a professor emeritus of finance at the Wharton School of the University of Pennsylvania. Questions or comments can be left at https://www.mtgprofessor.com. Distributed by Inman News Features.