I currently own a house in northern VA that's paid in full. I want to buy a new house in a development being built in MD.

A friend recommended getting a loan for the new house and put mine on the market to sell and once it sells pay the new house loan off early.

What would be the best type of loan for the new house? Are there any issues with paying the loan off early?

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    Where are you located? Another alternative would be to raise cash against your current home, and use that to finance the purchase of the new home. – Brad Thomas Nov 19 '16 at 20:08
  • @BradThomas I updated my question with location specifics. Thanks. – Andy Arismendi Nov 19 '16 at 20:11

You can certainly do that with getting a new loan if you want. As for what is the best loan, that depends upon many different factors. Your financial situation, credit score, level of debt, income, employment history, and a variety of other factors will determine which loan would be the best for you. Without knowing your situation a lot better, it would be pure speculation to answer your first question. Your best bet would be to discuss the situation with your banker, attorney, and accountant.

As for paying off the new loan early, you should read the paperwork of your new loan before signing it to determine this. Some loans have a fee for paying them early and some don't. This is why it's so important to read loan paperwork before you sign it. If you have trouble understand something, ask someone you trust. Ask a friend or trusted adviser to look over the paperwork before you sign.

I'm not an attorney. This is not legal advice. You should consult an attorney who is licensed to practice law within your particular jurisdiction.

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A regular mortgage is all you need. Because you don't anticipate holding the mortgage for long, you could even consider an adjustable rate mortgage if it gets you a better interest rate or better closing costs, because you would plan on paying off the mortgage before the interest rate goes up.

You would want to make sure that there are no early payment penalties, but in the U.S. it is extremely unusual for mortgages to have early payment penalties.

Get a mortgage that has 15 year terms or less, if you can afford the payment, so that in the event that the sale of your old home doesn't quite payoff the new loan, you'll have the new loan paid off as fast as possible.

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  • Some banks charge higher up-front fees for mortgages if the borrower's situation is consistent with the borrower wanting to promptly pay off the mortgage. – Jasper Dec 23 '16 at 19:37

I recommend avoiding the closing costs and interest all together. Put your house on the market, then put in an offer on the new development contingent on the sale of your home. This means if your house doesn't sell in time, you are not obligated to purchase, but still have the option to purchase. Find out what the average days on market are from your realtor to evaluate if this is a practical strategy. Additionally, this mitigates the risk of being stuck with an extra property in the event it doesn't sell.

If you do go with a loan, then depending if the new home needs built or if it's already built will dictate the type. If it needs built, you'll get a construction loan that rolls into a mortgage once built. If the new home is already constructed, than a traditional mortgage is going to be your cheapest route. Set the term short (like 10-yr or 15-yr instead of the traditional 30-yr). This should reduce your interest. Put at least 20% down to avoid PMI (more is better, as less principal = less interest accrual). While an adjustable rate mortgage may also reduce your interest in the short term, in a rising interest rate environment, if your current home doesn't sell, you may end up paying a lot more once the introductory rate expires. Confirm there is no prepayment penalty (which is rare in mortgages, but confirm anyway). Additionally, when you make that "big" payment, make sure you specifically tell them it's for principal reduction. Banks lately have been applying extra funds as early payments and charging interest as though it followed the amortization table then telling you your next payment isn't due for a while. It's essentially a legal why for them to charge you interest that hasn't accrued yet (costing you money). (We pay more than twice what our actual payment amount is each month and every month I have to call and correct the company to apply it as a single payment with all additional going to principal reduction.)

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