Q: I own a townhouse in a suburb of Washington, D.C. which is fully-paid off.
I recently retired, and I am thinking of relocating to a somewhat lower-cost area in Pennsylvania.
I believe that I could sell my townhouse for about $300,000. I would purchase a house for less than that (about $250,000) in Pennsylvania. I see no reason to incur a new mortgage obligation.
Someone advised me that I should consider a home equity line of credit. I was told that I could then look for a new house as a “cash buyer” and would not actually borrow the money, or pay interest, until I am ready to purchase. Then, once I had purchased the new home, I could sell the one in which I currently reside, and use the proceeds to pay off the home equity loan.
Does this make sense? Is this a better route than simply making an offer to purchase contingent upon selling my current home? I have every reason to believe that I could sell my house quickly, based upon local market conditions. My next-door neighbors recently got two offers above list price within 24 hours of listing their property.
A: Here’s the simple truth: Home sellers simply do not like to receive contracts that contain prior home sale contingencies – especially when the buyer is coming from out of state. It makes them very nervous that the deal might fall apart.
That said, sales have slowed in some parts of the country and perhaps in the Pennsylvania neighborhoods in which you’re looking, sellers would be happy to entertain any sort of offer you might bring.
But let’s start with selling your own home. You write that homes similar to yours in your neighborhood are getting multiple offers that are above the list price. As long as your home looks as good as your neighbors’, and you price your home at, or just above, where their home sold, your property should also garner the same level of interest.
Of course, that’s not certain, since real estate markets can change from day to day. But let’s assume you can sell within a few weeks.
That should give you plenty of time to make a deal in Pennsylvania. But even if it isn’t, you could always rent for a short period of time while figuring out where you’re going to live.
Now, let’s think about how to finance your new purchase.
If you have no loan on your current home and have found the home of your dreams and want to buy it, you can either get financing for the purchase of the new home or use the equity in your existing home to pay for the new one. And, yes, you are correct, that once you sell your existing home you can pay off your debt.
The real issue is determining how long you will have the new loan and what the fees will be to get the loan. Frequently, equity lines of credit or second mortgages have lower fees but higher rates. A mortgage you obtain with the purchase of a home may have higher fees but a lower rate. If you’re only going to keep the loan for a short period of time, it may make more sense to use a home equity loan or line of credit to purchase your new home.
In a sense, the people you have talked to are giving you good advice. You need to sit down with a good mortgage lender or mortgage broker and work through the numbers and see which loan appeals more to you. Just keep in mind that once you have bought the home in Pennsylvania, you will own two homes until you can sell your current one.
When your current house sells, you can pay off the loan and live mortgage free, or you can keep the loan and invest the cash you receive.
Published: March 2, 2006
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