Mortgage interest rates are great – in fact, at historical lows. There are a lot of great buys in the housing market. That perfect home down the road with 4 bedrooms and 3 baths that was going for $400,000 three years ago is now listed at $320,000! Attorney Ed, accountant Linda and even Uncle Fred (who really knows his stuff) are all saying now is the perfect time to buy a home – BUT I have a big problem: I have to sell my current home.
There are several options that allow you to purchase a new home without selling your current home. The problem is that nobody really wants to be stuck with two mortgage payments (heck, most of us don’t even want one mortgage payment). So the first thing you must consider is your comfort level and tolerance for risk. Some key points to consider:
- What is your monthly cash flow during the next 12 months if you have to make both mortgage payments?
- Do you have a decent amount of cash reserves that allow you to cover your mortgage payments without affecting your monthly cash flow?
- How much equity do you have in your current home? Will you have to turn down offers that are not at full listing price or do you have some room to negotiate?
There are several options to consider when faced with this dilemma:
Rent Your Home
Renting your current home may be a viable option, but be sure you want to deal with the headaches of being a landlord. Depending on where your existing mortgage payment is, you may be able to get rental income in excess of your mortgage payment and create a positive cash flow. However, keep in mind that with respect to your new mortgage, unless you have a two-year history of rental income, you will still need to qualify with both mortgage payments as if you did not have a tenant.
List, Hope and Wait
You can put a home under agreement and make it contingent on the sale of your existing home. The big risk in this strategy is that typically, your dream home will remain on the market with a 72-hour contingency clause. Another buyer can come in and make an offer on the home, literally stealing your dream home right out from under you. This certainly isn’t a bad option if your existing home is highly marketable and likely to sell quickly, but in today’s market those scenarios are few and far between
There are still some mortgage products available that allow you to take an “equity advance” on the home you are going to sell, and then make an interest-only payment for the interim period while you are marketing your home. This makes payments more affordable than carrying two fully amortizing mortgage payments. Susquehanna offers a Swing loan product that does just this; it is basically a home equity loan against your home. It allows you to advance equity for down payment and closing costs, as well as paying off your existing loans on the home, and it provides for a low, interest-only payment.
A similar but slightly different product is the blanket mortgage option. With a blanket mortgage, you have a single loan that is cross-securitized against both the home you have for sale as well as the new home; hence, you only have one single mortgage payment for both homes. This is typically a more favorable option if you are concerned about the time it will take to sell your existing home or if you want to leave open the option to rent out the home if you have difficulty selling it.
“You can’t always get what you want. But if you try sometimes, you just might find, you get what you need.” (Rolling Stones)
In today’s market, there are many great buys out there, with interest rates at historic lows. So if you have found your dream home and it fits within your budget, you may want to consider moving forward. Just remember that great rewards do not come without some risk, so be sure you understand the potential consequences for buying your next home before the current one is sold. There’s even a risk in delaying on a purchase, because that “perfect” home may be off the market or a lot more expensive a year or two from now.