Answer: You have some options, all of which have pros and cons. You'll have to decide which works best for you:
1) Bridge Loan
You could consider a "bridge" or "swing" loan. Using your existing home as collateral, you take out a bridge loan for three months to five years to use as the down payment on your new home. Once you've purchased your new home, you sell your old home and pay off its mortgage as well as the bridge loan. These bridge loans are considered last ditch propositions because they cost 5 to 10 points more than a typical equity loan and they require pristine credit records and lots of cash to afford the monthly payments.
2) Equity Loan
If you have the equity, it's a lot less expensive to simply refinance, or get a second mortgage or other equity loan. Equity loans, however, could preclude you from landing another mortgage for a new home if you haven't sold the old home if the lender believes you are stretched too thin.
To avoid another loan, you could sell your home with a contingency that says you must sell your old home before you can close on the new home. However, in a hot market, few sellers will be willing to accept such a contingency because there will be so many buyers without contingencies.
4) "Rent Back"
If you can't afford to own two homes and the contingency option isn't viable, a common move-up strategy is what's called a "rent-back". In a rent back you sell your existing home, but continue to live in it -- as a renter. As part of the sales contract, you agree to pay rent equal to the new buyer's mortgage payment, including principle, interest, taxes and insurance. The contracts are typically written for 30-days or less, with a 30-day or shorter notice of cancellation. The trick is to work hard to find a new home within the rent back period.
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