How to Buy a New House When You Already Own One

realtor.com

Don’t get stuck paying two mortgages

If you’ve outgrown your current home or need to move into a new neighborhood, it’s time to sell your house and buy a new one. Ideally, you would be able to easily make the switch, but chances are, you will face some hiccups along the way.

If you sell first, you may be left rushing to find a new place to live, and you may end up with a house that isn’t right for you. But if you buy first, you run the risk of paying for two homes at the same time. The transition becomes even more difficult if you need to sell your current home to make a down payment on the next one.

Assess the market

Take a look at home prices in both your current and future neighborhoods, and figure out whether each area is “hot,” meaning it’s a seller’s market, or “cold,” a buyer’s market. In a hot market, you will find that it’s easier to sell your current home and to buy a new one. In a cold market, the opposite is true.

Selling your home first

If you sell your home before buying another, the good news is that you’ll have the money for a down payment on your next house. But where will you live?

You might be able to draw up a contract with the new homeowners to remain in your current home if you agree to cover their first month’s costs: mortgage and any applicable PMI, taxes, insurance and utilities. Be aware that if your home appreciated while you owned it, the new owner’s mortgage payment might be much higher than yours was.

You might also be able to stay with a loved one, rent a hotel room or find a short-term lease on an apartment. This means you’ll need to move twice and perhaps put many of your possessions in storage, but your boxes will still be packed and ready to go to when it’s time to move into your new house.

Buying your new home first

If you qualify for a second loan and buy a new home before selling your current one, you’ll be faced with double the mortgage payments, insurance and other costs. However, there are a couple of ways to help you make the second down payment when you don’t yet have the proceeds from the sale of the first house.

First, check whether you can get a home equity line of credit. The interest rate should be about 0.5 to 1 percent above the prime rate, and the interest is tax deductible up to $100,000. Once you sell your original home, you can pay off the loan.

If a home equity line of credit isn’t an option, see if you can borrow a down payment from a loved one. You’ll both benefit—you can end up paying less than the going rate, and your loved one will earn more from the loan than from a savings account. Draw up a promissory note that details the terms and back it up with your new house as collateral. If you can, make the first monthly payment due only after you sell your original home.