Why You Don't Need to Sell Your Old Home Before Buying a New One
While many homeowners prefer to wait to buy a new home until after they've sold their existing one, this isn't always convenient. For example, if you're building a brand new home, you may not be interested in renting and/ or living with family until your dream home is complete. But at the same time, you already have valuable home equity built up in your existing home and you don't want to be stuck paying two mortgages. So what can you do?
The good news is you don't have to be stuck between a rock and a hard place! We have a few suggestions on how you can keep living in your existing home comfortably while still being able to wait for (and afford) the new home of your dreams!
A Tale of Two Mortgages
Brand-new homes can take up to a year to build from start to finish. Since starting construction requires you to take out a new mortgage, you might think only the super-rich can afford to build new homes. After all, you’ll need a down payment for the new home in addition to being able to pay two monthly mortgage payments.
However, there are two key things to note about this: a) you'll only start making mortgage payments on your new home build ONCE YOU TAKE POSSESSION. This is really important; it means you aren't making a monthly payment during construction; b) you would only have two monthly mortgage payments if your old house hasn't sold yet, and only until it sells.
HELOC Loans
With a home equity line of credit (HELOC), you take out a loan using your current home’s equity. This works best for those who can temporarily afford two mortgage payments but struggle to come up with a down payment because assets are wrapped up in the house you already own. Once your new home is ready and you sell the current home, though, you can easily pay off the HELOC loan.
Porting Your Mortgage
Some banks allow you to take your current mortgage and port it over to the new home. In this scenario, you’d combine what’s left of the current mortgage – including the mortgage rate and terms – and the new mortgage. If rates have changed, you keep the current rate on the remainder, and it’s blended with the new rate on the amount of the new mortgage.
Mortgage Payoffs
On the other hand, you might be able to simply include the current mortgage balance into a mortgage on the new home. For instance, if you only owe $50,000 on the first mortgage and want to buy a house for $500,000, you’d take out a mortgage for $550,000. However, you have to be able to qualify for this higher amount, and the bank may only do this with the assumption that you’d refinance after selling the current home and use that money towards the principal balance.
This solution may work for those who don’t owe a lot on their current home and already have enough money saved for a down payment on the new one.
Bridge Loans
A bridge loan is a short-term loan that a lender gives when a homeowner has a solid offer on his or her home but needs liquid cash to make a new purchase. Since these loans are usually only for three to six months, this would be ideal when your new home build is nearing completion. This is also ideal for brand new move-in ready home or a spec home that's almost ready.
People find this convenient because you get to keep your current home until you’re ready to sell, but you only have to deal with one monthly payment. It’s also a good solution for those who could face a payment penalty for paying off their current mortgage early.
Unsecured Loans
Home buyers with good credit scores may be able to qualify for an unsecured loan. This would be similar to a HELOC except there is nothing securing the loan i.e. home equity. In most cases, the interest rate on this type of loan is higher than you’d get with a HELOC, but if you don’t have enough equity in your current home, this might be a good solution.
Rent It Out
Sometimes, people simply prefer to wait a few years before selling their home. A slumping housing market may mean that you have a hard time selling your current home for the price you want. If you want to purchase a new home without taking a hit, you may be able to recoup some of your costs by renting the old place out in the meantime. Once the market improves, you can sell.
Buying a new home before selling your current one might sound like a complex process - but don't worry! Talk to your builder's preferred lender. Not only do they have a keen understanding of your builder's new home build timeframe, but they'll also help you figure out which options will work best for your unique situation.
*Originally posted December 21, 2017, updated October 15, 2018
