HELOC to fund 20% down payment on 2nd home
Our goal is to buy a 2nd house, move, then put our 1st house on the market (ideally, it will sell very quickly, however, we are planning on having to pay both mortgages for a while if needed). Let's assume for arguments sake that we have enough money in savings to handle closing costs, but don't have any for a down payment. We have been approved for a HELOC on our current home, with a limit of $75,000.
My initial thought was that I would pull from my HELOC to fund a 20% down payment on the new house. Since we would have 20% down payment, we could have a conventional mortgage and no PMI.
However, this poses a question. Assume the new house is $300,000. This means for a 20% down payment, I would need to borrow $60,000 from my HELOC. This does (2) things that will negatively affect my credit score, which in turn will affect our interest rate on the new home mortgage:
1.I will have $60,000 more debt.
2.I will have a high ‘balance to credit limit’ (60k borrowed on a 75k limit)
My question:
Would it be better to apply for a non-conventional mortgage with a lower down payment requirement, and pay PMI? (Lower down payment => less debt when applying for the mortgage =>lower interest rate). My thought is that once I close on the mortgage (interest rate locked in), I could then borrow from my HELOC to get above 20% and at that point should be able to have the PMI removed. Any advice is appreciated. Thanks!
Note:
There are actually 2 goals:
1. Maintain the flexibility of buying before selling
2. Obtain the lowest possible interest rate on the 2nd home mortgage