Should you unload your home before you buy a new one?
Sell now or run the risk of carrying two mortgages? In a buyers market, it's wise to consider your options.
Q: We want buy a house in another city that's closer to our grandchildren. Should we try to sell our house first? We could afford to pay two mortgages for a while, but with the uncertainty in the sales market, we are a little worried. What's the best way to handle this, typically? (Bing: Which way are home prices trending?)
— Louis W.
A: There are two different schools of thought here.
One says you should avoid giving up your present home because you may have to put everything in storage and move into less-than-satisfactory temporary digs if the purchase of your new home is delayed or falls apart. That could be a headache if you have pets and lots of furnishing and other belongings.
The other school of thought says you should never commit to a new house before you sell the old one, especially if you have to use the equity from the old house to buy the new one.
In a perfect world, of course, you would have enough cash to carry both mortgages indefinitely, and the coordination of the buy-sell maneuver wouldn't be an ordeal. But if you aren't in that position, especially given today's market realities, I'd lean toward cementing the sale of that existing home first, if possible. Because it's a buyers market, you stand to have far fewer problems executing the buy side of the equation these days because sellers tend to be more motivated — and grateful — that they have an offer.
If you want to buy a place near your grandkids sooner rather than later, a few financing options can mitigate the potential discomfort of carrying two mortgages. One is called a bridge loan, which gives you enough capital for a down payment on the new place and perhaps enough to pay your second mortgage for a while. In most cases, you wouldn't have to close on such a loan unless you needed it. A bridge loan, which you typically repay when you sell the house, generally requires an appraisal. Plus, an origination fee will kick in when you start using the loan.
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Or you could take out a home-equity line of credit to use toward the down payment and closing expenses. Some lenders frown on this if you've already put your present home on the market. Arrange for your line of credit before the sale, but commit to leaving it alone until it's needed. Financing and terms will depend largely on your income, of course.
Some contractual strategies might help you avoid falling into the dual-mortgage chasm, as well. You could add a "sale of buyer's home contingency" to your sales contract. This is sometimes called a "Hubbard" in industry lexicon. It allows you a stipulated period, typically two to three months, to sell your current home before you must close on the new one. There's also a "reverse Hubbard" that allows the seller a set time period to find a replacement home after accepting a purchase offer. Both allow "outs" without repercussion, with the proper contract language. The downside to the Hubbard is that other buyers can swoop in with no-contingency offers and grab the house you want. In the case of the reverse Hubbard, they can drop your deal to buy another house that isn't saddled by these contingencies.
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These days, at least in my opinion, the sale of the present house trumps the purchase of the new one in order of importance.
In this market, only a fool would attempt to juggle two homes at the same time. Sell your home first! You might be able to lease it back for a few months until you find your new dreamhome. Stay away from bridgeloans! Sellers recognize that contingencies to sell existing homes aren't always going to pan out. Try not to read too may advice columns from real estate gurus who have no actual background in real estate. Freelance writers are not experts. Your ability to bargain on a new home is greatly diminished by the conditions that you build into the offer. I've been a broker for almosty 40 years and I try to talk Sellers out of entertaining offers with strings attached. Sell your existing home first!