Posted by Great news! Arizona home prices are up! That means homeowners can now sell their home and realize a profit. It’s about time. What if you are buying a new home before selling your current home?
The American dream for many involves selling their first home and moving up at some point to purchase their dream home. However, the timing does not always pan out. Oftentimes, people will find the dream home before they have sold their previous home. This puts one in a bind. After all buying a home is very emotional and once the heart finds the right home it is time to move!
What happens if a home-buyer’s plan was to sell their current home and then to use those proceeds as a down payment on the new home however they could not sell their home first? Or, what if a buyer wanted a specific loan amount/a specific monthly payment yet their current home is not even on the market yet and they needed the proceeds from their home sale to get to their desired loan amount? If the borrower is using a Conventional loan to finance their new dream home there are 2 very helpful strategies that can employed.
Strategies to Buying a New Home Before Selling
There are 2 different mortgage plans that a homebuyer can utilize to help the buying a new home before selling their current home. Both of these strategies will allow a homebuyer to eventually end up with the mortgage loan amount and monthly payment they ultimately wanted even if they cannot sell their home first.
Strategy 1: Recast your mortgage
If a borrower finances their new home using a Conventional loan they will later have the ability to recast that mortgage. A recast allows a buyer to put a lump sum of money down on an existing mortgage after they have already closed on it. The key feature of the recast option is that the mortgage payment on the now lower mortgage balance will be recalculated based on the new reduced balance and the remaining term of that mortgage.
Let’s assume a borrower purchases an Arizona home using a $424,100 30 year fixed Conventional mortgage. Let’s also assume that 3 months later (after they have closed on their dream home purchase) they sell their old home and use $200,000 of the net profit to pay down their new loan. With a mortgage recast, their mortgage payment would be re-calculated or RECASTED based on a $217,000 loan and the remaining 357 months (30 years minus 3 months). The big benefits of a recast are:
1. Borrower avoids the costs associated with a refi
2. Borrower keeps their existing interest rate
3. Borrower avoids having to do another appraisal
4. Borrower reduces their monthly mortgage payment and their overall mortgage balance
It is important to note that a recast typically carries a cost of $500 to $750.
Strategy 2: Obtain a 2nd mortgage
Yes, you read that right. 2nd mortgage are back! There are several great uses for 2nd mortgages. One of the best uses for a 2nd mortgage is to bridge the gap between buying a new home before selling. Now we are not describing a traditional bridge loan. Instead, buyers can use a 2nd lien to “fill the gap.” For example, lets assume a borrower wants to ultimately end up with a $200,000 loan however they don’t have quite enough money to put down to get to that mark without selling their current home.
Let’s assume this borrower is purchasing a $400,000 home and they only have $100,000 to put down. In this case, they could take out 2 loans. The first would be a $200,000 Conventional loan (their ultimate target loan amount) and the second would be a $100,000 loan. Then, later on after they sell their old home they could simply pay off the 2nd lien and wind up with one loan at $200,000 matching their original goal! Note that the early closure of a 2nd lien could cost anywhere from $200 to $500 in an early closure fee.
The changing market demands creative solutions for today’s buyers and seller. These 2 options are great ways to help a buyer who is buying a new home before selling their old home!
By Jeremy House
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