8 Ways To Buy A New Home When You Already Own One
Right now in Denver, there’s more buyers than sellers and plenty of demand. That, coupled with lower inventory, supply chain issues and years of under building, has likely cemented us in an unbalanced market for the foreseeable future. This can be especially unsavory if you’re itching to move on from your current home, but fear you have no place to go. If that sounds familiar, here’s a few things to consider:
Selling vs. Renting Your Place
Not everyone needs to sell their home in order to buy their next, and this doesn’t just apply to “wealthy” people. Ultimately, it depends on your goals. You might look into the rent averages in your area, crunch the numbers and determine the potential cash flow is well worth holding and renting it out. This strategy is one of many reasons I was able to quit my job.
But if you're someone who has zero interest in becoming a landlord; would rather get rid of the house, and pocket the cash instead, selling may be a better option. The good news? Either way, you don’t have to sell your home first in order to buy your next. Let me explain.
Determining Your Equity
Probably one of the most important steps to determine how you can move forward – whether it’s buying first, selling second or not selling at all – is finding how much equity you have (or your home’s estimated value minus your total mortgage balance), and determining if you’d be able to purchase a new home without tapping into it.
If you have a large savings or other assets you can leverage, this might be a non-issue. However, if you don’t, there are several avenues to buy a home and supply a down payment without selling your current one, first. Here’s how:
Down Payment Options
Put less money down.
There seems to be this general misconception that you need to put 20% down in order to buy a home. While this is a good goal to aim for and has several upsides (e.g. not paying mortgage insurance, smaller payments), it’s not true. Most conventional loans require 3.5 to 5% down. Point is, you don’t need to come to the table with a large fortune. While the tradeoff might mean larger monthly payments, it can often be a temporary solution.
Pro Tip: should you come into more money at a later date or after the loan closes, you can still put that money down, and request your lender “recast” or “re-amortize” your loan with the new principal balance (at its current rate) to lessen your monthly mortgage payment. This might involve a fee and typically comes with a minimum payment amount (e.g. $5,000), but could be a great option if you sell your house later or come into a large windfall of cash, and want a more manageable monthly payment. Ask your lender first.
Submit a contingent offer on a new home.
This tells the seller your offer is contingent on the sale of your own home or that other conditions need to be met before the sale can be completed. These can be tricky to get past the cutting room floor in today’s market, but there’s still plenty of sellers accepting contingent offers, especially if there’s nothing better on the table.
Ask for a seller leaseback on your current home.
This usually provides 30-60 days post-occupancy and is pretty commonplace today, since many sellers need to find a place first to live. This means you can sell your house first, continue to live in it, pay rent to the new buyers, while you “buy” yourself (no pun intended) time to find your next home.
Get a home equity line of credit.
If you have enough equity in your home, this enables you to access that equity without refinancing it at a potentially higher rate. It acts like a revolving line of credit – similar to a credit card – and can be drawn on and paid back as needed. This could have a negative impact on your debt-to-income ratio if you’re looking to get a new mortgage, so talk to your lender on the implications first.
If you have a sizable nest egg in your 401 (K), you might be able to either take out a loan (which needs to be paid back with interest) or make a withdrawal (doesn’t need to be paid back, but has big tax implications). Each option has potential benefits and drawbacks. Always best to consult with a tax accountant or financial planner first.
This involves taking out a new home loan for more money than your current one and receiving the difference in cash. This can work great when rates are low (or lower than your current interest rate), but has some potential downsides when rates are high.
Pro Tip: if you’re renting your home anyway, let the math do the talking. In other words, if you find that nearby rental comps would cover your new mortgage payment and then some, a cash out refinance might be well worth it, high interest rates or not.
Get a bridge loan.
A bridge loan is short term financing that allows you to purchase a home before selling your current one. The upsides of these is they’re generally interest-only and can mean a pretty manageable monthly payment, but they can come with large, unavoidable closing costs, fees, and generally need to be paid back within 12-18 months.
Creative financing/cash-offer loans.
This involves special qualifications, but a lender essentially purchases the home for you in cash and resells it to you at the same price. Pro tip: check out my blog post, “7 Tips for Making Your Offer Stand Out” to learn more.
Whatever you choose, make sure you understand the pros and cons of each option, and discuss these scenarios with trusted advisers (like your CPA, agent, financial planner or lender) to determine what’s right for you.
