Home Equity or Home Loan to purchase a new home

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newkidontheblock
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Home Equity or Home Loan to purchase a new home

Post by newkidontheblock »

We currently own our home free and clear.
We are moving out of state this summer. So we are planning on purchasing a home in the new state before we sell our current home.
We don't need the proceeds from the current home to make a downpayment for our next home.
We want to move to the new home in late June or early July.
I recently learned from my banker that if we buy a home based on a loan we have to move into the house within 60 days.
We are already looking for homes and were hoping to buy the house if it met our needs. It will give us a chance to get it ready for moving into it during summer.

Can I take a home equity loan for my current home and a downpayment to buy our new home?
We will pay off the home equity once we sell our home. Home Equity loans have lower closing costs.

Just wondering if there are any cons to using a home equity loan to buy the next home.
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lthenderson
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Location: Iowa

Re: Home Equity or Home Loan to purchase a new home

Post by lthenderson »

The cons of using a home equity loan to buy the next home are:

1. Added risk by using your primary residence as collateral.
2. You have to pay closing costs on the loan plus closing costs on the new house which can add up.
3. Some mortgage lenders (wasn't clear if you are paying 100% or just putting a down payment with the home equity loan) won't accept payments from a home equity loan so research ahead of time where you plan to get your mortgage if necessary.

Since you don't need a loan to make a down payment on on the next home, I personally would just make a down payment and then pay off the balance once you've sold your previous house and captured the equity. I'm assuming the closing costs on the loan are much more than the costs associated with setting up a mortgage. It might not be everywhere but it would certainly be where I'm from. This eliminates all three cons I mentioned above.
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newkidontheblock
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Re: Home Equity or Home Loan to purchase a new home

Post by newkidontheblock »

Con 2/3 does not apply to us because if we have a home equity loan we will not need another loan.
We will buy the new home with Cash.

I read the Heloc closing costs are much lower than home loan closing costs.

Whether we use Heloc or Home Loan we plan to pay it off as soon as existing residence is sold.

We were trying to avoid the higher closing costs and the requirement to move into the new home with in 60 days.
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enad
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Re: Home Equity or Home Loan to purchase a new home

Post by enad »

If the down payment for the new home is less than or equal to the maximum amount of your existing HELOC, go for it, unless you can get another loan at less interest. Depending on your financial institution the costs for the HELOC can be taken care of by the financial institution (this is often the case for a Credit Union, not sure about a bank)
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sport
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Re: Home Equity or Home Loan to purchase a new home

Post by sport »

We were in a similar situation. I went to a local Savings & Loan and asked about a "bridge loan" which we would pay off when the old house sold. They told me it would be better to take out a mortgage on either the old house of the new one. So, we took out a mortgage on the new home. We saved 0.125% off the mortgage rate if we used autopay to make the payments. So, we opened a checking account at that S&L for that purpose.
newkidontheblock wrote: Mon Jan 23, 2023 3:26 pm I recently learned from my banker that if we buy a home based on a loan we have to move into the house within 60 days.
We had no such restriction on our loan. Our old home took longer to sell than we expected and we owned both houses for about 10 months. We moved into the new home after 6 months because the new home had a 12 month warranty from the builder and we wanted to live there long enough to identify anything that needed correction while the warranty was still in effect.

The mortgage we selected was a "no fee" mortgage that had a rate of 0.25% more than the one with closing fees. Since we did not expect to have that loan very long, the higher rate was not important to us.
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lthenderson
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Re: Home Equity or Home Loan to purchase a new home

Post by lthenderson »

newkidontheblock wrote: Mon Jan 23, 2023 3:26 pm Can I take a home equity loan for my current home and a downpayment to buy our new home?

I read the Heloc closing costs are much lower than home loan closing costs.
So which is it? You do realize a home equity loan and a HELOC are not the same. Both borrow from home equity but a HELOC a line of credit that uses variable interest rates and can generally be paid back at any time. A home equity loan is a lump sum loan paid back in installments and has closing costs as a percentage of the initial loan that can range from 3 to 5%. I based my response off of your initial statement about a home equity loan. A HELOC doesn't have closing costs but does have fees for getting initially approved and a minimum number of years before it can be closed out to allow the bank time to recoup some of their costs in setting it up, at least mine did anyway.
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newkidontheblock
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Re: Home Equity or Home Loan to purchase a new home

Post by newkidontheblock »

lthenderson wrote: Mon Jan 23, 2023 6:10 pm
newkidontheblock wrote: Mon Jan 23, 2023 3:26 pm Can I take a home equity loan for my current home and a downpayment to buy our new home?

I read the Heloc closing costs are much lower than home loan closing costs.
So which is it? You do realize a home equity loan and a HELOC are not the same. Both borrow from home equity but a HELOC a line of credit that uses variable interest rates and can generally be paid back at any time. A home equity loan is a lump sum loan paid back in installments and has closing costs as a percentage of the initial loan that can range from 3 to 5%. I based my response off of your initial statement about a home equity loan. A HELOC doesn't have closing costs but does have fees for getting initially approved and a minimum number of years before it can be closed out to allow the bank time to recoup some of their costs in setting it up, at least mine did anyway.
It has been a long time since I though about HELOC or Home Equity loan. Sorry I was mixing them up. I will read up on both to see what requirements a bank may have. If there are requirements like a minimum number of years I may just get a new home loan and pay it off when the current home is sold. I appreciate your help.
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