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I've lived in my one-bedroom co-op for 12 years. It's worth about two and a half times what I paid now, and I'm shopping for a bigger place. The problem is that I don't have enough cash on hand for a down payment unless I sell. Am I better off getting a home equity loan so that I can borrow money for a down payment when I need it, or should I sell my current place and rent while I look for a new one?
Before you decide how to proceed, you should review your entire financial picture with a mortgage broker, according to our experts.
"I would advise you to review your total financial picture with a mortgage broker, who, because they are familiar with a wide range of products, may be able to suggest a financing solution to meet your needs," says real estate broker Gordon Roberts of Sotheby's International Realty. "Concentrate on preparation. Get your financial records in order, check your credit report and fix any inaccuracies, get a professional opinion of the value of your current apartment, and keep abreast of the current market for similar sales."
Another step you can take now is to get your apartment ready to sell, by de-cluttering and staging the space for prospective buyers. (See Brick's guide to selling for some tips.) You should also start exploring your options for buying, taking into consideration the neighborhood and type of building you're interested in, and what you might need to do financially to qualify to buy.
If you're focused on co-ops, keep in mind that their requirements vary.
"Some are quite liberal, but most, in my experience, err on the side of extreme caution," Roberts says. "You can download a standard Financial Statement worksheet from REBNY and in filling it out, see how your current apartment’s value (a non-liquid asset) stacks up against your income, cash in bank, stocks and bonds, and debt, and gain some insight of how you look on paper."
Taking out a home equity loan may be an attractive option, as many lenders allow buyers to borrow as much as 70-80 percent of the appraised value of their homes. There are other factors to consider, however.
"Borrowers must have enough income to support a new payment. The equity in the current property is taken into consideration, but is not the only decision point," says Brittney Baldwin, home equity loan officer at National Cooperative Bank (a Brick sponsor, FYI). "If the property is going to be sold and listed, the borrower may not qualify for a home equity loan. Co-op board approval would be required to obtain any new loan placed on the property."
Depending on your personal finances, as well as your co-op board's policies, it may make more sense to sell first rather than refinance. Also, Amid the many decisions you'll need to make, don't forget about your homeowner's insurance policy.
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