How to buy a new home while selling your old one

Spending weekend after weekend touring open houses. Filling out page after page of mortgage paperwork. Packing and unpacking box after box.

While a hopeful and exciting time for many, the experience could be stressful, especially when you also have to sell your old home at the same time.

In many cases, selling your current home before buying a new one makes the most sense financially, because you can use the proceeds from the sale to cover a down payment—or even make an all-cash offer—on a new property, depending on how much equity you have in your current home.

The timing, however, doesn’t always work out. For example, you might find your dream home sooner than expected and feel compelled to make an offer before another buyer swoops in, even though you haven’t yet sold your existing property. Or perhaps the buyer you thought was ready to close on your current home backs out at the eleventh hour, when the ink has already dried on the contract for your new home.

As such, it’s important to have a plan in place to cover the upfront costs in case you find yourself needing to buy a new home before you’ve completed your sale. Here are five financing options to consider.

• How it works: You can use money you’ve already saved to help cover a down payment, provided you have a sufficient amount on hand.
• Potential benefits: Paying with cash may speed up the mortgage approval process and may help secure a better interest rate.
• Potential drawbacks: Tying up a large sum of cash in a new home may leave you with less available for emergencies, investments or other financial needs. For larger transactions, like an all-cash offer, even a healthy cash reserve may not be sufficient.

• How it works: You can use a bridge loan from a financial institution to help finance the new home purchase and then pay off the loan once your other house sells.
• Potential benefits: A bridge loan provides access to immediate liquidity so you can make a competitive offer on your next home without having to sell your current home first.
• Potential drawbacks: Bridge loans tend to have a higher interest rate than a typical mortgage, plus closing costs and fees typically ranging from 1.5% to 3% of the loan amount, increasing your overall costs, along with shorter repayment periods compared to other loan types.¹

• How it works: A HELOC lets you borrow against the value of the equity in your current home. You can use this borrowed money to make other purchases, such as a new home down payment.
• Potential benefits: A HELOC may offer a lower interest rate than a bridge loan. If your financial institution approves you for a HELOC, you can access the specific amount you need at any time during the specific draw period.
• Potential drawbacks: A HELOC draws on your home equity, which may potentially reduce your borrowing power when applying for a mortgage.² In addition, HELOC interest rates are variable, which may make it harder to calculate how much you’ll eventually owe. And remember, there is a risk of foreclosure if you can’t pay it off in time.

• How it works: A home equity loan is similar to a HELOC in that it allows you to access the equity in your home for liquidity. The key difference is that a home equity loan provides the money as a lump sum, rather than as a line of credit that you can tap when you need it.
• Benefits: Unlike a HELOC, a home equity loan offers repayment options at a fixed rate and repayment terms. This can help a homebuyer know exactly how much they’ll owe each month for budgeting purposes.
• Drawbacks: Like a HELOC, you’re using your home as collateral, which runs the risk of foreclosure. Also, you will receive the loan funds all at once, so even if you don’t need all the funds quite yet, you’ll still be on the hook for the interest and making payments.

• How it works: A Securities Based Loan allows you to borrow against the value of eligible securities in your investment portfolio.
• Potential benefits: This approach can help you tap your portfolio for liquidity without having to sell investments or change your long-term investment strategy. Also, because you aren’t selling portfolio assets with embedded gain or losses, you won’t trigger a taxable event.
• Potential drawbacks: Because your investments are collateral, you may not be able to sell these assets until you pay off the loan. If you do sell your investments, the proceeds have to remain as collateral. While the proceeds cannot be withdrawn, you are able to trade.  In addition, your lender may require additional collateral or ask you to pay off the loan if your portfolio declines below a certain value.

¹ Forbes Advisor, Is a Bridge Loan Right for You? by Kiah Treece, published Aug 12, 2020, Is A Bridge Loan Right For You? – Forbes Advisor

² “Using Home Equity To Purchase a New Home (2024 Guide),” MarketWatch,  updated May 8, 2024: https://www.marketwatch.com/guides/home-equity/using-home-equity-to-purchase-a-new-home/