Moving Up with Old Equity

You're one of the lucky ones. You not already own your own home, but you've also built up considerable equity over the years...enough to make a sizable down payment on an even bigger home. And you're even luckier....your dream house finally came on the market! Wee-hooo!

But there's a problem now, in order to buy that big new home you must first sell the one you're in now. And you can't sell your home fast enough to buy the big one. What do you do?

There are more than a few considerations for those who experience this not uncommon scenario. Qualifying may be one, closing on time may be another, but without the sale of your home you won't be able to put that equity into the new home, giving you a final mortgage you're comfortable with. Here are three options to consider.

A bridge loan is a short-term mortgage placed on your current residence for the specific purpose of buying another home. Upon completion of the sale of your current house, you simply pay off the bridge loan. This is usually the most convenient way of leveraging your equity without cashing it in.

If you don't want a bridge loan or don't like the terms, apply for a piggyback mortgage with your new house. A piggyback is merely a second loan on one property. Say the new sales price is $400,000 and you want to use the equity in your current home to give you a $100,000 mortgage on your new one. Put a nominal amount down, say 5 or 10 percent, apply for a first mortgage of your target amount of $100,000 then obtain a second mortgage (piggyback) for the remainder of $260,000. Upon sale of your old home, simply pay off the second in its entirety and you're left with just a $100,000 mortgage.

Still another option is to recast your new mortgage. Many lenders will re-amortize your mortgage if you make a sizable principal reduction while still keeping the old terms. If your $300,000 loan is paid down by $200,000, arrange to have your loan recast, keeping your same rate and term. This avoids all the associated closing costs of refinancing. But beware, not all lenders will recast on their loans.

In all cases, of course, you'll want to check costs and terms to see which program works best for you. You'll also want to speak with various loan sources to see who can offer your the best possible financing.

If you anticipate a windfall shortly after the purchase of your new house, for whatever reason, know that there are options in the finance arena to help you achieve your goals. So when you do find your dream home but don't think you can afford it without a big down payment, remember you do have choices.