Following my earlier post of 20 percent down payment, I got several inquiries of other sources of down payment. The very obvious one is home equity line of credit (HELOC).
When homeowner wants to move up from current property, they first consult a lender or a real estate agent to evaluate how much his home worth and apply for a HELOC and use it as purchase down payment.
Very important thing is: this action needed to be done BEFORE LISTING OF YOUR CURRENT PROPERTY. Recommended period 6 months ahead.
Why: If your property is already on the market, it’s not to a lender’s benefit to lend you money, because it would be hard for them to figure out your true equity.
Once you got a equity line of credit, you go out and find a property and buy it, using HELOC as your down payment and close the deal and move in. The moment you start using your HELOC, the interest starts accrued. All HELOC use a variable interest rate, which means, your payment each month is different. Depending on the program, most equity line of credit has a draw period, say 10 years, when you start to draw your equity line, you start paying interest, after 10 years, you will have to pay principle.
That’s not what of my intention to inform you. You want to payoff this HELOC as early as possible, because, as I mentioned, HELOC is interest only and payment differs each month. You want to sell your original home as soon as possible. Once the home is sold, you can payback the HELOC and close the loan.
There’s also bridge loan. Instead of using HELOC, you apply another loan to pay for down payment. The lenders are always willing to initiate a new loan if you qualify. The loan amount is usually small, up to 3% of your purchase price. The teaser, what the lender usually called, the bridge loan, is to give you a very attractive initial interest rate, say 1% to 3%, but it has a very short loan life. Some can be as short as one month, others can be up to 6 month term. No matter what, they offer you a deal you can’t resist. Now you have your sources of down payment, you can go out to buy that bigger dream home you want. But, remember, just as in a new marriage, your “honeymoon loan” needed to be repaid in 1 to 6 months (depending on the terms), in order to last the “sweet deal” and have a new life!
Which one to use? I would examine the rate and term of the loan/HELOC very carefully. Either one is good. The essence here is: you want to pay it off as early as possible once you sold your original home. You don’t want to drag it a long time to create a burden.
One side note of this: Most purchase loan programs will come with an equity line of credit, free, if you put a lot of down payment and if your loan-to-value ratio is small. It’s not too humble to ask your loan officer to apply you a HELOC at the time you apply for your major loan. Because, in this case, you save the application fee and expensive closing cost later if you need to open one, as well as someone snoozing into your financial status.