Once a homeowner decides to buy a new house, she's faced with an important issue: Which comes first, the selling or the buying?
If you decide to buy first, the problem of financing comes into place. How do you pay for a new house if you haven’t sold the old one? What if you already have a mortgage on the current house — can you get a second mortgage? Should you?
Let's be honest — most of us don't have the liquid cash lying around to buy a second house without a loan. Even if we did, many might not want to.
We've got some good news, though.
There are a few ways you can go about buying a house before selling your current house, and we'll explore all of them at a high level.
The benefits of buying a house before selling your current one
Think about it: Buying first is obviously the best option if cash is not a problem. But then where do you live until you buy a new house? With friends? In a hotel or Airbnb? With parents or in-laws?
Buying before you sell provides a solution to the questions above. Below are a few reasons someone should want to buy their new home before selling their current one: :
- Avoid moving twice - saving time & money on costs of moving, storage, and lodging..
- Get settled into your new home immediately.
- Relieve the stress of a home sale contingency. You can wait until you find a high-paying buyer for your old house with less pressure to sell quickly.
Let's explore the home sale contingency. Basically, you only get the new house if you sell your old one. It can be easier in less competitive markets, but you can never be sure if you'll sell your current house within the agreed-upon period — or at the price you want. So, it's back to square one for you. (Or into your in-law's home!)
But there's good news. You do have some options to buy before you sell that don't involve a home sale contingency.
What are your options for buying a home before you sell?
Having said that, how do you buy a new house if your old house has a mortgage? If your old home has a mortgage, here are some common financing options to help you buy before you sell:
- Use a bridge loan
- Do a cash-out refinance
- Get a cash mortgage loan (huh? We'll explain later, don't worry)
A bridge loan is a short-term, higher-interest loan used to buy a new home. It is specifically designed to be used in transitioning from one house to another (bridging the financing gap between selling one and purchasing another, hence the name).
Once you buy the new home, you have to sell the old one as soon as possible and repay the loan. Upfront fees may be high, and payment can be made in one installment. It's a risky move if you don't sell in time.
As an alternative home financing plan, a cash-out refinancing strategy involves taking a new mortgage large enough to cover the current mortgage and leave you with extra cash. This is the cash you use to pay a deposit for the second house.
Cash-out refinancing helps you to take advantage of lower interest rates. But for it to work, you need to have significant equity in your current house.
In addition, cash-out refinance may not be suitable for buying a replacement home. Many lenders will require you to stay in the current house for at least one year after cash-out refinancing. Nevertheless, you can use it to finance a second home while keeping your current one.
Cash Mortgage From the Equity in Your Home
OK, so we know that home equity refers to the part of the house that you own outright. It is an asset you own.
Let’s say the value of your home is $500,000. You currently owe $200,000 on the mortgage. This means the equity in your home is $300,000.
You could sell the house for its market value of $500,000 and use the $300,000 in equity to purchase a new home after you pay off the remaining original mortgage.
But what if you've only built up maybe 20% equity in your home?
There's still an option for you. This is where a "cash mortgage" comes into play. In other words, you leverage the equity in your home to get a cash-backed mortgage that you use to buy your new home. Because it's cash, you remove that annoying home sale contingency.
When a Cash Mortgage Is a Good Option
At a high level, here's how it works: With some innovative mortgage lenders, you can unlock existing home equity to buy a new home even before you sell your old home.
This is a good option if:
- You don't have a ton of equity built up in your old home (but have at least 20%)
- You want to avoid temporary high fees
- You aren't made of liquid cash
The Basic Steps of a Cash Mortgage
Here are the basic steps, but keep in mind that these things may vary from lender to lender. It's always best to get the facts of a buy with cash before you sell program upfront, so don't be afraid to do your research.
- You use your existing property to apply for the cash mortgage program via a lender that offers one.
- You get approved, usually in a few days. This means you get to go search for a new home with a mortgage that takes into account 85% of the equity in your old home. (The percentage may vary based on the lender)
- You put an all-cash offer on the new home you want. By the way, cash offers are 4x more likely to get approved; that's why this cash mortgage program is better than a home sale contingency.
- Your lender helps you align the closing of your old house to that of your new house.
- The actual sale of your home can happen in a few ways, depending on the company and its program.
- Some allow you to sell your home as you see fit, using the realtor of your choice at the price you want. If, by chance, it doesn't sell on time, the lender will buy it from you in the interim until you sell it for the price you want. You keep the profit.
- Others require you to sell your home to them or use their realtors to sell it. If you're OK with losing some profit, this option may be alright for you.
Obviously, this approach is a bit more complicated than the others. Then again, when is a mortgage not complicated?!
Bottom Line: Know your options
There are a lot of options out there for people who want to buy a home while they still own a home. It's also important to keep in mind that the mortgage industry is changing, thanks to technology-based companies that have recently emerged in the space. As home buyers and mortgage shoppers, the best thing we can do for ourselves is stay educated on the changing real estate world.