Many Arizona homeowners have equity in their homes. As a result, many folks are considering the purchase of a new home based due to the fact that a home sale now can net profit.
Selling & Buying a Home at the Same Time
In an equity market, buyers have several strategic options when buying and selling at the same time. In prior markets, the strategy behind selling and buying at the same time was often:
STEP 1: Short sell your house
STEP 2: Buy in x years when you qualify again due to short sale
Currently, the challenge is timing. How do you best time up the sale of the home you live in with the purchase of the home you will live in? Sounds simple. However, simultaneous sell and buy transactions have many layers. For example:
- Are down payment funds coming from your sale?
- Can you live in your home while it is listed for sale?
- Can you time up the buy and sale date on the exact same date?
Selling With a Contingency
One way to manage this process is with a contingent sale offer. A contingent offer simply means that you put an offer in on a new house and say “I am only buying your house if my house sells too.” While safe, this option is not one size fits all. Sellers do not love contingent offers. They will factor in thoughts like “what if the the buyers sale falls through?”
Previously, a bridge loan solve the contingency issue. Bridge loans essentially fronted buyers the equity from their sale ahead of time. While bridge loans are no more, a mortgage recast offers similar assistance in today’s market (see below for more).
In addition to the contingency challenge, Arizona homeowners encounter down payment related challenges when selling and buying simultaneously. Buyers often rely on the profit from their home sale for their down payment on the new home they are buying.
When buyers are uncertain their home will sell prior to needing to buy, they feel stuck. For example:
- You borrow more than you want to
- Your monthly mortgage payment is higher than what you want
- You pay mortgage insurance
However, a recast offers a great alternative.
Recast – Less Down Now & More Down Later
In short, mortgage recasts allow buyer’s to put down a small down payment initially. Then, further down the road that same buyer is allowed to put more money down on their new loan. The magic of a recast is that the buyer’s mortgage payment is recalculated after the subsequent down payment is made.
In other words, a mortgage recast allows a buyer to buy a home first with a small down payment initially. Then, after closing on the sale of their old home they put additional funds down on their new home loan to lower their monthly payment.
By Jeremy House