Selling before you buy is usually a homeowner’s preference because you can use your equity to fund your purchase. However, there are circumstances when it makes good sense to buy your new home before you sell the current one. This post will explain when that option is beneficial and how to prepare for the process.
Photo credit: Active Home Bay Listing – Los Angeles, CA
Your current house can make you money:
Due to increasing home prices, many popular cities in the US are experiencing low rental inventory and high demand. If your city falls into this category, you have a big opportunity to make some serious money if you’re willing to rent out your house. Before you sell, consider the option of using your current property as a passive income generator, especially if your mortgage is either mostly or completely paid off. In this circumstance, you won’t be selling at all, but instead will be leveraging your home as an income property for as long as market conditions permit.
Mortgage rates are about to increase:
Rumor has it that mortgage rates are going to increase in 2016. While they are not going to get anywhere near as high as they were after the market crash, an increase of even half a percent can hurt your buying power, especially if home values continue to rise. So should you hurry up and buy before rates go up?
In this case, your decision will come down to simple math. You need to figure out if paying a double mortgage for a few months will work out to cost you less in the long run than the rate increase and a higher purchase price. You also have to make sure you’re in a position to accurately predict how long it will take to sell your property.
If you’ve already gotten plenty of offers or are starting escrow, chances are you’re safe to move forward. Just make sure you have money saved for a down payment (if you’re taking out a loan that requires one) in addition to the money you’ll need to cover both mortgages for at least several months.
You found the perfect house at the perfect price:
It’s no secret that inventory at certain price points has been painfully low, especially in California. Bidding wars pop up left and right, and it can be devastating if you’re not in a position to act on a listing that seems like the perfect fit. While there has been a lot of blame put on developers for the shortage, USA Today recently published an article that explains all the other contributing factors. Regardless of the circumstance, it can be frustrating for buyers trying to get into the market to have very limited options. So if you find that perfect house, should you take the leap and put in an offer?
The best case is, you’ll put in an offer and your home will sell while you’re in the purchase process. The worst case scenario is, you’ll be stuck paying two mortgages. Once again, you’ll have to do some math here to make sure you’ve got enough cash to cover your current mortgage, new mortgage and a down payment if you owe one. Ideally, you’ll want to have enough money to cover at least six to twelve months worth of payments. If you’re in a position where you’re financially able to support both house payments and you can’t stand to watch the house go, it might be worth taking the leap.
What if I can’t afford a double mortgage but have to move now?
If you can’t swing a double mortgage, you are not alone. Taking on two house payments is a huge financial commitment. If your home has been on the market for several months and you have a hard date that you need to be out, consider these three options:
- Rent out your home and act as a landlord or hire a property management company to rent it for you.
- Take out a personal line of credit to cover the double mortgage cost if you can get a good intro rate
- Ask a friend or family member to stay at the house and offer discounted rent as an incentive if possible.
Consider each of the above circumstances outlined above before you list your home to make sure you’re making the best decision for your equity and your future.
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