Moving? Time your sale to avoid extra financing charges

Buying a home can be complicated enough. But it can be even more challenging when you’re selling your home and buying a new one at the same time. And if things don’t go smoothly -- for example, if the closing dates on the two homes don’t coincide -- you can end up facing significant financing costs. Here are some ways to keep these costs to a minimum.

1. Get pre-approved for the new mortgage
First, get pre-approved for a mortgage for your new home. You can start by requesting a mortgage through LendingTree and getting pre-qualified with up to four lenders. You can then choose which offer you prefer and, contingent upon various things including verification of your assets and credit, get pre-approved with that lender directly.

The lender will commit to providing you with a loan of a certain size during a certain time period.

Getting pre-approved enables you to know exactly how much you can afford to spend on your new home and can make you more attractive to sellers as you will not have to make an offer contingent upon obtaining financing.

The other advantage of getting pre-approved is that it enables you to lock in the interest rate on your new mortgage so you won’t end up being charged a higher rate on your new mortgage if rates rise before you close on a home. Lenders will sometimes guarantee your rate for 30 days without a charge, or a three- or six-month lock-in may carry a fee.

2. Try to close the sale of your current home first
The best way to avoid a cash squeeze is by making sure you complete the sale of your existing home before you close the deal on your new home. That way, you’ll have the down payment from your present home to use as a down payment on your new one.

You don’t need to come up with all the money to pay for your new home until closing day. When your offer is accepted on the new home, you will have to post a deposit, called “earnest money.” This is typically 1 to 5 percent of the selling price, depending on the local market. The lender may also require you to pay some fees up front, such as mortgage application or origination fees and credit report fees.

However, most of the other money, including your down payment, the remainder of the purchase price, and all the other fees and taxes, will be paid at closing. So, as long as your old home closes first, you’ll have the money you need when you need it.

3. Avoid high-interest financing
If your present home doesn’t close until after your new one, you’ll have to come up with the down payment for the new one and carry the mortgages on both homes until the old one closes.

You could opt for a bridge loan. This is a short-term loan secured by your present home. It may allow you to borrow up to 90 percent of the equity you have in the home. But the costs are high: interest rates are typically 1 to 3 percent above the prime rate and you may have to pay six months’ interest up front.

4. Use a home equity line of credit
Another option is a home equity line of credit on your old home. The interest rate could be more than 1 percent lower than that of a bridge loan. There’s no up-front interest payment, and since you draw the money only when you need it each month, your total interest costs are lower.

There may be a penalty, however, if you sell your home within a year after taking the line of credit. And remember, a home equity line of credit is still secured by your home, so if you fail to repay the money, it can be seized. However, it can help you carry the load until your sale goes through, and possibly at a less onerous cost.