Ask an Expert: Buying and selling a home
Q: How can I avoid carrying two mortgages when buying and selling a home at the same time?

A: Moving is stressful enough without the prospect of finding yourself owning two houses — and two mortgages. Unfortunately, if you buy a new home and are unable to sell your current home before closing, that’s just what can happen. Fortunately, there are ways to avoid this situation.

Bridge financing (a short-term loan to cover the time between the closing date on the home you are buying and the closing date of the home you are selling) is a good short-term solution. But it can be expensive to carry a bridge loan for many months.

Here are some tips to help you avoid becoming a reluctant dual homeowner for an extended period of time.

• Sell first. Determine whether it’s best to sell your current home before buying a new one, or vice versa. In general, it’s best to buy first when the market is hot, and sell first when it’s cool. Trying to sell your home quickly in a buyer’s market is a bad situation — you’ll have fewer potential buyers to begin with, and if they know you’re under pressure they can use it as a bargaining chip to lower your price. 

•  List at fair market value. Make sure you price your current home accurately when you first list, especially if you’ve already purchased a new house. If your asking price is too high, your home will take longer to sell. As the closing date on your new property approaches, you may have no choice but to drop your price significantly.

• Request a long close. If you’re buying a new home first, ask the seller for a long closing date to give yourself as much time as possible to shop for a new house. Expect to give up something in return — you may need to increase your offer, or make some other concession.

• Make a conditional offer. Consider inserting a clause into your purchase contract stating that the deal is contingent upon selling your current home. Be aware, however, that some sellers may be put off by these contingency clauses. After all, they do not want to rearrange their own moving plans to accommodate you.

• Consider renting. If you’ve already sold your current home and the closing date will arrive before you have a place to go, ask the buyers whether they’ll permit you to rent your old home from them. In the opposite situation – if you’re ready to move into a new home but haven’t sold your current one — consider renting out your former residence. If you go this route, make sure you stipulate in the rental agreement that your tenants will have to allow agents and prospective buyers to drop in.

Dan Moore
Vice President, Product Management

Which is better: PMI or piggyback loan?
Here’s how to weigh your options if you plan to buy a home with a down payment of less than 20 percent.

Homeowners who make a down payment of less than 20 percent are usually required to pay private mortgage insurance (PMI), because they are considered to be at higher risk of default. PMI premiums are typically around half a percent of the interest rate, which is about $83 a month on a $200,000 mortgage.

Piggyback loans were created as an alternative to this extra expense. With this strategy, the homeowner makes a 10 percent down payment, gets a mortgage for 80 percent of the home’s value, and then takes out a second loan for the remaining 10 percent. Because no single loan exceeds 80 percent of the property’s value, PMI isn’t required. And the combined payment of the two loans may be less than the cost of a single mortgage plus PMI, especially since the interest on a piggyback loan may be tax-deductible.

In recent years, piggyback loans — which are sometimes structured as home equity lines of credit — were so attractive that mortgage insurance companies were losing customers in droves. But two important things have happened to even the playing field. First, the prime rate (the rate these loans are most often tied to) has more than doubled since the summer of 2004, while mortgage insurance premiums have stayed about the same. Second, a new federal law allows some taxpayers who buy a home in 2007 to deduct their PMI premiums. These two changes have closed the price gap between the two options.

For example, let’s say you’re purchasing a $250,000 home with a down payment of 10 percent and have opted for a 30-year fixed-rate mortgage at 5.75 percent.

Here’s how your choices might look:

Option 1: You take out a mortgage for 90% of the home’s value ($225,000) and pay PMI.

Mortgage payment: $1,313.04
PMI premium (0.5%): $93.75
Total monthly payment: $1,406.79

Option 2: You take out a mortgage for 80% of the home’s value ($200,000), plus a piggyback loan for the other $25,000.

Mortgage payment: $1,167.15
Piggyback loan payment (8.5%): $192.23
Total monthly payment: $1,359.38

In this case, the monthly payment is almost $48 lower with Option 2, though the piggyback loan may carry origination fees that add to the cost of this option. In addition, if you are able to claim your PMI premiums, you may be able to get a larger tax deduction with Option 1. A small change in any of the interest rates used in this example can also tip the balance in the other direction.

A few caveats about the new law, which companies selling PMI have long lobbied for. It allows taxpayers to deduct PMI premiums as long as their adjusted gross income is $100,000 or less. It applies only to people who purchase a home in 2007. It is unclear whether or not the law will be extended into 2008 and beyond. If you’re already paying premiums on an existing mortgage, you can’t claim the deduction.

If you’re planning to buy a home with a small down payment in 2007, talk to an accountant or tax adviser who can help you determine which option is the least expensive in your particular situation.