How Can I Buy Before I Sell?

July 19, 1999, revised January 6, 2006 "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 do I handle this?" 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. Use a swing loan if you have a contract of sale on your current home, a home equity loan if you don't. 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 gave 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. The great advantage of a home equity loan is that you needn't have a contract of sale. Indeed, if you have a contract of sale, a lender might be reluctant to give you the loan. A HELOC (line of credit) is best because upfront costs are small, and these are more important than the rate. On a 3-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 anymore than you need to about how you intend to use the loan. Copyright Jack Guttentag 2006

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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