Your old home seems too cramped, and you’ve been surfing local listings. You’re imagining moving into something bigger, different, or closer to hot spots…but if your cash is tied up in your current home, where’s your down payment money coming from? When you don’t have tens of thousands of spare dollars sitting around, what are your options for finding new home funds?
It may sound tricky to come up with a decent sum of cash. However, options like using the equity in your current home, 401k savings, credit unions, or companies like Homeward make it possible for you to snatch your perfect home off the market before selling your current one.
A Home Equity Line of Credit, or HELOC, allows you to borrow against the equity you have in your current home. It essentially acts like a credit card that’s linked to your home equity, and the line of credit is secured by your home. HELOCs typically have a period of 5 to 10 years where you can draw funds, and repayment periods vary, but can extend up to 20 years.
HELOCs usually have lower interest rates because your existing home is the collateral. And with this loan type, there are often no closing costs, and the interest you pay is tax deductible if you’re using the funds to buy, build, or improve a home.
When you get a home equity loan for down payment on new home, you can create the 20 percent down payment you need for a strong offer and avoid having to pay Private Mortgage Insurance (PMI). Additionally, with a larger down payment, the loan for your new home’s mortgage could be smaller.
The goal with a HELOC is to use the funds to secure your new home, sell your existing home, then use the sale proceeds to pay off the HELOC in full. However, if you default on your payments, the lender can foreclose on your current home. Plus, if you have a HELOC loan with prepayment penalties, you may pay fees for paying the loan off in full. Some loans also have variable interest rates, which can cause you to pay more overall.
Taking funds from your retirement account is another way to secure the down payment for your new home. You gain a lump sum without having to sell your existing home, and you have two borrowing options: a distribution and a 401k loan.
With a traditional 401k distribution, you pay the early withdrawal penalty of 10 percent plus taxes on the total amount, and whatever is left over is your down payment. Those with Roth IRAs can withdraw contributions whenever they’d like without paying penalties, though.
If you use a 401k loan, you can borrow up to 50 percent of your total 401k balance or $50,000 (whichever is less), then pay it back with interest. But if you quit or lose your job the entire loan amount becomes due by the next Federal tax filing date. And missing payments can mean the 401k loan switches to a 401k distribution. If this switch happens, you’ll be on the hook for paying the 10 percent penalty plus any taxes.
Borrowing down payment money from your 401k account can work for some homebuyers. Yet, you’re still taking the funds from your future retirement, typically having to pay fees and interest, and needing to pay it back in order to retire.
Homebuyers who are already credit union members, with good credit scores and low income-to-debt ratios, may want to consider a loan with their local credit union. Credit unions may have better rates and loan types than large banks, and they’re usually more flexible.
You’ll need to pay origination fees, but some buyers may be able to negotiate good terms like no prepayment penalties. Because you’re in the process of buying a new home and selling an existing one, credit unions might be able to provide favorable bridge loans or similar products to help with your new home transaction. However, getting another loan may affect your credit history and impact your ability to get a good mortgage for a new home.
Instead of getting financing for only your down payment, you could go with an option like Homeward that covers the entire new home purchase without having to sell your existing home first. With a pre-approval letter from a lender in addition to Homeward’s approval, you’re able to go house hunting with Homeward’s funds.
When you’re ready to make an offer on a new home, Homeward and your agent work together to present the offer as all cash to the seller on your behalf. And if it’s accepted, you agree to leaseback and repurchasing terms with Homeward, and can move into your new home then start prepping your existing home to sell.
When you’re current home is sold, you obtain a conventional mortgage to buy back your new home from Homeward. With this kind of service, you can move into your ideal new home, have time to prep your current home for sale, and then sell your existing home for full market value.
Regular routes don’t always work for your specific financial situation, especially if you need the equity in your existing home for a new one. Because many homebuyers don’t have enough free-flowing cash for huge down payments without selling their current home, alternative financing may be the path that works best. If you’re able to use a service like Homeward, or use home equity to purchase new home, 401k, or credit union loan, you can easily bridge the buying and selling transactions between your new and old homes.
Interested in learning more about how Homeward can help you purchase your dream home? Check out how Homeward works, or call 512-956-5087.