Down payment. Where to find the cash for a down payment. Hmmmm.

I haven't sold my previous home yet, but I'd like to move forward with the purchase of a new home. Where can I get the down payment from?

This is a conversation we've been having with a number of clients recently. In some cases, these folks would like to move forward with the purchase of their new home but their current home has not yet sold. In other cases, they may have decided not to sell the existing home and rent it to a tenant instead. But in both cases, this means that the equity that they would have otherwise taken out (upon selling the current home) is locked up in that house for a little while longer. So what can we do about the down payment for the purchase of the new place?

We've actually seen a few creative solutions to this dilemma over the past couple of months. I will outline a few in the blog today. But there are many other ideas we could come up for your situation, so be sure to give me a call if none of these meet your criteria and we'll come up with a perfect scenario for you.

In one client's situation, they are actually planning to use the bonus that he is getting from his employer. However, the timing for receiving the bonus check will not correspond perfectly for the closing so family members are helping them out with a gift in the meantime.

In another scenario, the client is taking out a short-term loan against his 401k, but then plans to repay the loan as soon as he has the proceeds from the sale of his home.

In yet another client's situation, they have enough cash liquid that they can do a 5% down payment. So for the purchase of their new home, we are planning to finance about $150,000 on their permanent 1^st mortgage and finance the rest of the purchase on a temporary 2^nd mortgage of about $100,000. Then when their current home sells (they plan to fix it up a bit then put it on the market in the Spring) they will take the proceeds from the sale of their current home and pay off the temporary 2^nd mortgage, leaving them with just their $150,000 first mortgage. Pretty creative, right?

Years ago, we would have looked at bridge loan financing for transactions like this. And in some cases, we may look at doing a version of a bridge loan if that is what works best for the client. Tapping in to the equity of the current home could be a very viable alternative. But with so many other creative alternatives these days, a bridge loan may not be the most cost effective.

Let's sit down and review your situation to see what works best in your case. There could be a number of creative options that are right around the corner!

So when I do finally sell my current home, shouldn't I use all of the proceeds from the sale for making the down payment on the new home?

Often the answer to this question is a resounding YES!  However, in some cases we may actually find that there could be another, wiser use for some of those funds.  Often we see that a borrower may be better served by using some of the proceeds from the sale of their current home to shed consumer debt, even though the tradeoff may mean a higher mortgage.  To determine which would be a better fit for an individual applicant we need to do a very careful analysis.

If, for example, we see that someone is carrying $15,000 in a car loan at 8.5% interest and a credit card balance of $10,000 at 14% interest, then this borrower is paying approximately $2,600 per year in interest for these two debts.  The scenario I am highlighting today is to perhaps take $25,000 from the proceeds of the sale of their current home and divert this money instead to the elimination of these two debts - the car loan and the credit card balance.  By doing this, they would add $25,000 more to their new mortgage loan than they otherwise would have done, but their interest will only increase by approximately $1,300 per year.  That is about half what they were paying on the consumer debt!

But there is another option that is even more exciting that could be afoot in a scenario like this - the payment differential.  The payments they were making on the consumer debt are approximately $400 per month.  But the payments on the mortgage are only $126.52 more per month.  That means this borrower has $273.48 left over each month that they could use in any number of ways.  But if they used the extra $273.48 to pay down the principal balance of their mortgage, they could have their mortgage paid in full 8 years ahead of schedule.

There are myriads of options on how to best utilize an extra $273.48.  One of my coworkers recently helped a client in a similar situation use these funds to pay for their son's college.  That's an example of why we love what we do!  We can use the strength of numbers like this to help people realize their dreams.  

Let us help you reach your dreams!

Last week I discussed one option for those that would like to move on to purchasing their new home before their current home is sold. Today, I'd like to continue along this theme - current homeowners that would like to buy a new home - and help illustrate why this is such an ideal season.

As we all have read in the media for the past couple of years, the real estate bubble burst and home values in many areas dropped quite a bit. For someone that purchased a $250,000 home, for example, they may now only be able to get $225,000 if they sold their current home. No one relishes the idea of selling their home for less than what they paid for it. Thus, many simply say they will "wait until the market rebounds" before selling. But for the move-up buyer, this strategy actually works against them. Let me explain.

If you are selling a home and then plan to move on to a higher price range, the strategy works against you if you would like to wait till your current home rebounds in value. The reason for this is that while you are waiting for your current home to rebound in value, the home that you plan to move up to is increasing in value as well. For example, if you wait for your $225,000 home to go up, say, 10% in value, you will be able to sell it for $22,500 more in price. Now doesn't that sound like a good idea on the surface? It would, until you look at the other side.

If the home you are buying also goes up in value you may end up at a loss. That is, if you were planning to buy a $325,000 home after selling your current home, that new home just went up in price by $32,500. So what ends up happening is that you gain $22,500 more on the sale, but then you end up spending $32,500 more on the purchase. That's a net $10,000 on the total of the two transactions.

Think about both sides of the transaction to see the overall value. Next week - more for the sell/buy buyer!