I know you’ve heard of the phrase “which came first, the chicken or the egg?”. It kind of makes you think of what happens when you consider selling your home. Which should you do first – purchase your new home, or sell your current abode? What’s the better option?
Some don’t have a choice – equity plays a very big role when it comes to purchasing a home. If you need the equity out of your current home, and if your income limits your ability to qualify for having both mortgages at the same time, the crystal ball is quite clear. You’ll need to sell first before you buy. However, some buyers do have sufficient financial resources, and those resources can play a major role in facilitating moving before the home is sold.
There is a home equity line of credit called HELOC. HELOC is a type of loan that a traditional lender like a bank will loan up to the difference in what is currently owed on the home and 75-80% of the value. A borrower is approved for the line of credit and then, can borrow against it as needed.
If you, the homeowner, have sufficient equity, you would want to secure a HELOC prior to contracting for the new home. Typically, the interest will be due monthly. When you sell your home, the loan would be paid off along with any other liens on the property like the first mortgage.
Another loan is called a bridge loan. We all know what a bridge is, and this is actually quite similar. It’s a specific amount of money for a short term use to “bridge” the time frame necessary to acquire the replacement property and sell the existing home. The amount available is like the HELOC, usually, up to 80% of the home’s value less the existing mortgage.
A hard money lender may be a little more flexible in some of their requirements, but that comes at a cost. They can charge two to three percent (aka points) of the money paid up-front, plus the interest rate will be higher than long-term mortgage money.
Looking for another alternative? Find a conventional lender who has a program which would allow you to recast the loan in a specified period. The borrower would get a low down payment mortgage on the replacement home (the home being purchased). Plus, after the original home is sold and funded, the lender will apply the lump sum toward the principal amount owed and recalculate the payments and amortization schedule.
With recasting the loan with this approach, the borrower does not have to go through the process of getting a new mortgage by refinancing, and will save the costs involved in that process. Most conventional loans and conforming Fannie Mae and Freddie Mac loans allow it after 90-days. FHA, VA, GNMA loans do not allow recasting.
If you have a 401(k) retirement account, you could consider borrowing against that asset which could be a lower interest rate. However, if the loan isn’t repaid within a certain time period, there could be several taxes and penalties.
These are all several options, each with it’s good and bad points. Every situation is unique, and you would want to talk to your real estate professional to determine which option may work best for you and your current needs.
Your real estate professional will be able to do a comprehensive market analysis to indicate market value and the net proceeds you can expect to have. This will assist you in determining which option makes sense for you at this time. They can also recommend lenders and approximate timelines for each alternative.
Ready to sell your home? Then we should talk. I’m always available to talk to you at 703-303-4010.
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