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Buying your new home before selling your old home

It's risky to buy a new home before you sell your old one. But, for some repeat home buyers the benefits of buying first may out-weigh the risks.

Before proceeding, carefully consider the pros and cons. Suppose it takes longer to sell your current home than you anticipate. Also, your home could sell for considerably less than you think it will.

Do you have the financial resources to cover these unfortunate situations? Budget conservatively so that you're not caught short of the cash you'll need to survive until your old home sells and the transaction closes.

Despite the risks, there are numerous benefits to buying first. First, you know where you'll be going and when. And, you know how much you'll be paying.

Second, if you've outgrown your current home, you may improve its market appeal by moving your family and most of your possessions out. Left with minimal furnishing, and a little staging for sale, your home might show better and sell faster.

Preferring to buy first is one issue. Affording it is another matter. Most buyers need to liquidate equity from their current home to buy the next one. Taking a loan out on the existing home is one way to get access to the cash. A loan from relatives is another.

Once the cash down payment hurdle is crossed, you'll need to have enough income to qualify for a mortgage on the new home without having your current home sold. Some lenders will take rental income on the current home into account if you can provide a bona fide lease agreement.

Also, many lenders are more lenient on their qualifying ratios (they'll allow more debt than usual) if the high debt is because of a second mortgage payment, and not due to consumer debt. You may have to show the lender that your existing home is listed for sale.

REPEAT-BUYER TIP: Let's say you have enough cash for a 10 percent down payment without selling your current home. One way to structure the financing is to apply for an Adjustable Rate Mortgage (ARM) on the new home for 90 percent of the

In order to keep your carrying costs to a minimum until your old home sells, you may want to apply for an ARM that has a payment cap feature. These loans are called payment option loans.

Here's how a payment option loan works. Your ARM will have an initial interest rate that will be in effect for a period of time, varying from one month to one year. When the interest rate adjusts to a new rate, you'll have several payment options if you have an ARM with a payment cap. You can either make the minimum payment due (which could result in negative amortization), an interest-only payment or a fully-amortized payment.

For example, suppose you have a $300,000 mortgage on the new home. Your initial (or "teaser") interest rate is 4.95 percent; your monthly payment is $1,601.

After three months, your interest rate increases to 7.23 percent. At that time you have the option of continuing to pay $1,601, the minimum (or capped) payment amount. Or you can make an interest-only payment of $1,807 or the fully-amortized payment of $2,042.

Both the interest-only and fully-amortized payment options pay the entire amount of the interest due so you avoid negative amortization. But, the minimum payment allows you to conserve cash while you're carrying two homes.

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