Expert: liznarr - 3/21/2009

Question
This is my situation:

1.   My house is paid for.
2.   I don’t want the stress of selling and buying a house at the same time.
3.   I would like to buy a house, pay ½ down from savings, get a loan for about a year. After I get settled, I will put my house on the market and pay off the loan when it sells.

Is this feasible? I have substantial savings and no debt, but since retiring, I don’t have a large income. I am wondering what kind of loan I should get? Home equity on my old house? Some kind of short term "bridge" loan? Let me know what you think.

Thanks

Jo

Answer
Hi Jo,

As long as your credit score is good and you have enough income to satisfy a lender’s requirements to meet the monthly payment obligation, I certainly think your scenario for financing is feasible.  Lenders LOVE buyers who go in with a 50% or more equity position.  The lender knows that in the event of default by the buyer, they should be able to sell the home quickly and recover their loan amount.

Since you are retired, I am going to assume you do not want a loan with fluxuations in any monthly repayment amount you might obligate yourself for, so I would suggest going with whatever type loan you can get that has:

1.   A fixed interest rate,

2.   Low closing costs,

3.   A financing term long enough so that you do not have any balloon payment possibly due before your old house sells, and last

4.   The best interest rate you can obtain.

If a home equity loan with a lender fits the above criteria, go for it.  Just make sure you do not have a variable interest rate.

Bridge loans are often designed to be temporary in nature, generally 6 months to one year.  The monthly repayment method is often interest-only payments with a variable rate of interest, with the principal to be paid off in a balloon amount at a pre-determined date.  If you go with this type loan, make sure you have the option to extend the due date and/or renegotiate the due date and/or loan for the entire amount due should your house not have sold by the due date of the payment in full.

Which ever type loan you end up going with, make sure that you understand UP FRONT what your closing costs will be.

Good luck to you, and feel free to write again if you have additional questions.

Regards,
Elizabeth