Our goal is to buy a 2nd house, move, then put our 1st house on the market (ideally, it will sell very quickly, however, we are planning on having to pay both mortgages for a while if needed). Let's assume for arguments sake that we have enough money in savings to handle closing costs, but don't have any for a down payment. We have been approved for a HELOC on our current home, with a limit of $75,000.
My initial thought was that I would pull from my HELOC to fund a 20% down payment on the new house. Since we would have 20% down payment, we could have a conventional mortgage and no PMI.
However, this poses a question. Assume the new house is $300,000. This means for a 20% down payment, I would need to borrow $60,000 from my HELOC. This does (2) things that will negatively affect my credit score, which in turn will affect our interest rate on the new home mortgage:
1.I will have $60,000 more debt.
2.I will have a high ‘balance to credit limit’ (60k borrowed on a 75k limit)
Would it be better to apply for a non-conventional mortgage with a lower down payment requirement, and pay PMI? (Lower down payment => less debt when applying for the mortgage =>lower interest rate). My thought is that once I close on the mortgage (interest rate locked in), I could then borrow from my HELOC to get above 20% and at that point should be able to have the PMI removed. Any advice is appreciated. Thanks!
There are actually 2 goals:
1. Maintain the flexibility of buying before selling
2. Obtain the lowest possible interest rate on the 2nd home mortgage
@Dan Craze The 60k pull should not affect your credit so greatly to the point it affects your ability to get a loan if you have a strong credit history or it's rate. Also it will take 2-6 weeks for it to even reflect on your credit report What you should be most worried about is the debt to income calculation. What you should do is get a HELOC off your primary home primary to moving out that has a long amortization and interest only payments then notify the lender you are using on the second property you will use the HELOC for down payment. They will then give you a prequalification assuming the minimum payment that would be owed on the HELOC for the down payment. Once you have an accepted offer that will ask you to make the withdrawal immediately to disburse to your account and provide a bank statement showing the minimum payment as soon as one is generated. The question of whether to pay PMI is hard to answer because it leaves you with more money to leverage but also cuts into cash flow. I would take no closing costs with a higher rate to keep more cash in hand and put the 20% personally but if I was cash strapped and did not perceive I could value add on the home enough to get my cash back out I would consider paying PMI but only at 10-15% downpayment depending on how much the PMI was based on the downpayment amount. If you have strong credit the PMI should not rise too much if you put 10-15% down.