Is it better to buy a new Charlottesville home before you sell your current one, or should you sell the home you have before you buy the replacement?
This year’s low inventory real estate market makes it more of an issue than ever before. Very few sellers will consider an offer that contains a home sale contingency, but buyers are worried that they could sell their current home and not be able to find a suitable new home to buy.
Some buyers don’t have a choice because they need the equity out of the home they have in order to purchase the next one; their income limits their ability to qualify for two mortgages at the same time. However, a buyer, with sufficient financial resources, may have other options available to facilitate the move.
A HELOC IS ONE OPTION
A home equity line of credit, or HELOC, is a type of loan by which 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. The borrower is approved for the line of credit and then, can borrow against it as needed.
A Charlottesville homeowner with sufficient equity, would need to secure a HELOC prior to contracting for a new home. Typically, the interest will be due monthly. When they sell their current home, the loan would be paid off along with any other liens on the property like the first mortgage.
A bridge loan is different in that it is usually a specific amount of money, borrowed for a short term, 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.
Some lenders may require being in the first position which will result in retiring the existing mortgage first from the proceeds from the bridge lender.
Hard money lenders are a little more flexible in some of their requirements compared to typical lenders, but it comes at a cost. They could charge two to three percent, called points, of the money borrowed paid up-front and the interest rate will be higher than long-term mortgage money.
Another alternative is to find a conventional lender who has a program that allows you to recast the loan in a specified period. The borrower would get a low-down payment mortgage on the replacement home and 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.
By recasting the loan, the borrower does not go through the process of getting a new mortgage by refinancing and saves the costs involved. Most conventional loans and conforming Fannie Mae and Freddie Mac loans allow it after 90-days. FHA, VA, GNMA loans do not allow recasting.
Borrowers with 401(k) retirement accounts may consider borrowing against that asset which could be at a lower interest rate than other temporary options. Depending on the size of the 401(k), the amount available to borrow could be up to half the balance or $50,000 whichever is less. If the loan isn’t repaid in a timely fashion, there can be taxes and penalties.
In each of these options, the homeowner is involved in borrowing money to accommodate a purchase and sale of a home. There will be expenses involved but the advantage is that they have a better chance of realizing most of their equity while facilitating a purchase before they sell their home. This is particularly helpful in markets that are low in inventory like our current local real estate market.
Your real estate professional will be able to do a comprehensive market analysis to indicate the market value of your current home as well as the home that you are considering purchasing. They can also recommend lenders who will give you approximate timelines for each alternative, as well as assist in determining which option is best for you.