I have clients that do that all the time. It's so common here it's unbelievable.

The one warning I would give you is that money taken from a HELOC has a 3 day right of rescission period before you actually get the money. So if you needed those funds to close on your new house on a Friday, the HELOC would have to be closed on a Monday or a Tuesday in order for the 3 full days to be in effect.

Also, make sure your realtor does a VERY accurate CMA for your neighborhood to help you price it right. What really gets sketchy is when a person takes out a HELOC, buys a new house, then can't sell the old house for what they took out.

I'm sure others will chime in as well, but those are 2 pitfalls I've seen first-hand.

A few years ago, I used an HELOC to buy my current home.
One pitfall is some lenders require you to keep it open for a minimum time period. Mine required one year minimum, or you face a penalty. I think it was $350. Anyway, I had mine for quite some time before using it to purchase a home.

Not sure if I would do it in this market, but thats a different topic.
Good luck.

-jasper

I think it's a great idea, as long as you are comfortable with making the HELOC payment until your first home is sold, in addition to the mortgage on your new home when it closes. The nice thing is that you would not have to move twice (which could potentially be a problem if you are trying to time house closings) and your negotiating power as a non-contingent buyer would be very strong (as compared to a contingent buyer). Some reasons this shouldn't be done is if you are not comfortable making two payments or if you do not have enough reserves to accommodate making the extra payments during the time it would take to sell the first home.

I would consult with an experienced professional (Realtor or Mortgage Broker/Loan Consultant) because the best answer really depends on the details of your individual financial situation.

Good luck and I wish you the best!

I, and others I know, use this strategy to buy investment properties. There are several advantages and disadvantages. Here are a few:

Advantages

1. Obviously, you donÂt have to qualify for a new loan (other than the HELOC).
2. You have extremely high negotiating leverage and can make lower offers with the expectation of a quick closing. That is, offer 25% less than normal and state you want to close in two weeks -- a doable, but perhaps extreme example for you but I think you get the point. DonÂt pay cash or close quickly without expecting something in return. This works well if you find a "motivated" seller but even a "normal" seller will feel better knowing you have cash in hand. At minimum, every month they have to wait during escrow costs them finance charges.
3. Good interest rate and zero closing costs. For larger amounts and a good FICO score, itÂs pretty easy now to find a HELOC at prime -1%. I read recently about a Prime -1.01% loan.

Disadvantages

1. Rate is variable and maybe higher than a conventional mortgage
2. CanÂt deduct interest on amount higher than the cost of your first home + 100K. Paying cash for your next home might limit the deductability of any interest over 100K if you choose to refinance (speak to a CPA about this).
3. If you buy another home and canÂt sell the first quickly, youÂll be paying on two loans.
4. If for some reason you chose to refinance your new home, refinance rates might not be as favorable as a new home loan. Plus, many lenders want the first loan to season before theyÂll refinance. This means you might have to wait 6 months or so to refinance.
5. It easy to get around the requirements banks impose to protect themselves, and you to a degree. A bank would normally require an appraisal and title insurance. You donÂt have to buy these but probably should. DonÂt be penny-wise and pound foolish.

We just got word today that the HELOC on our second house is ready to close. We are getting this loan so that IF we ever find a buyer for our old house, we will be able to pay off the HELOC on the first house, which was the downpayment on this, our second house. So, as soon as we get around to signing the papers, we will have FOUR mortgages.

We are rapidly approaching the one year mark on having our old house up for sale. With all the updates we had done in that house, it was quite a shock to learn that it would take this long to sell. We really did not recognize the problems we would have selling. Our economy here in Michigan is the pits. Layoffs are still happening, and even starter homes like ours are sitting forever on the market.

We could not do the interior repairs the house needed while we lived there. (We were too crowded after the addition of one sweet 90 year-old father!) We could not have shown the house easily with three dogs and a 90 year-old to vacate with every showing. Plus, we really did need the extra room. So we bought and moved out, then hired neighbors to get the old house ready to sell. We did a lot of repairs and updating, painted and had the wood floors refinished. We had a three year-old remodeled kitchen that everyone loved and praised. We NEVER thought we would still be waiting to sell it a year later. Luckily, we do live well below our means, so we can afford payments on the two mortgages on the old house, and the one on the new one. With the new HELOC, we can lower our price further and see if we can unload the old house.

So be very careful. If your market has had any slowdown at all, be sure you understand how far the prices have fallen. Here, that is very hard to determine. Prices seem to make no sense at all, with huge sale price differences that do not seem to be connected to the size or condition of the houses. Make sure your market will allow your old house to sell quickly before you jump into this plan.

Thanks everyone! After reading all the input, I think we should be ok. We are planning on taking out the loan this Friday but won't use it for several months at least. I am unsure about the penalty if we pay it off too soon, I will call the loan officer today to ask. We are in S. FL so homes aren't selling like they used to. We will get a Realtor to assess the value before even going to look for a home. Hopefully I can find an honest one. We have a wood frame house also, that may be harder to sell then a concrete home. :( If we have to carry both loans for a while we should be ok, assuming my hubby doesn't lose/quit his job. We also live well below our means, unlike most people here in S. FL lol. My main concern now is selling this house, we can price it very low just to get out but then we would have to pay something out of pocket at closing. We won't have jobs right away at the new place so our savings is crucial and I don't want to dip into it, but if we have to we will. I will probably post other inquiries later because I have so many questions! Thanks reno_fan, jasper_60103, bobleilani, jeff_90254,and nancy_in_mich, you were very helpful! Also, good luck Nancy, I hope everything works out for you!

One more thing, if anyone can answer..
If we pay cash for the new home, do we put it in an escrow account until closing on the home? Who decides what happens to the money until closing? Just wondering because I am fearful that we will put all this money up to buy and then maybe lose it somehow because it was given to the incorrect person before closing. Thanks!

One more thing, if anyone can answer..
If we pay cash for the new home, do we put it in an escrow account until closing on the home? Who decides what happens to the money until closing? Just wondering because I am fearful that we will put all this money up to buy and then maybe lose it somehow because it was given to the incorrect person before closing. Thanks!

Actually, a deposit that you agree upon in the contract for the new home is all that is needed until right before you close escrow. Here in No. California, the deposits are typically around 1% of the purchase price. The title/escrow company only follows the written instructions in the contract (which they get a copy of along with your initial deposit check) so I wouldn't worry too much about your money being lost. Even if there is the rare chance of human error, it's not something that can't be fixed. Anyway, when you go to sign papers, that's when you should be prepared to come up with the balance needed to close, you can either have a cashiers' check or arrange a wire transfer. Just remember to always reference the escrow number and you should be fine!

One more thing, if anyone can answer..
If we pay cash for the new home, do we put it in an escrow account until closing on the home? Who decides what happens to the money until closing? Just wondering because I am fearful that we will put all this money up to buy and then maybe lose it somehow because it was given to the incorrect person before closing. Thanks!

How does owning two homes affect one's taxes and possible capital gains?

First question, let's say someone buys a second home and moves into it. This is now the primary residence, right? Or does that matter for tax purposes?

Second question, Jeff said "CanÂt deduct interest on amount higher than the cost of your first home + 100K." Is that based on the first home's sale price + 100K, loan balance + 100K, or appraised value + 100K?

Third question, the owners sell the first house and make some money off of it. Assuming they were in the first house more than 2 years and made less than $250K (or whatever the cap is now), would they owe taxes on the capital gains because it was no longer the primary residence or for any other reason?

Fourth question, can you run down the trade offs (mainly tax wise) of taking out the HELOC vs. refinancing the first house and taking money out?

I know, consult a CPA, but there has to be some conventional wisdom on this...

Thanks everyone! I'm sorry about the triple posts also, I have no idea why that happened!