By Jen Walker
Maybe your family is growing, and you don’t have the space you need in your townhouse. Perhaps you are an empty nester, and you need to downsize. Maybe you’ve decided you’re sick of yard work and would rather live in a condo.
You’ve heard you need to be competitive, as the current real estate market favors the seller, so that means you can’t use a home sale contingency. But how can you buy a new home without selling the one you currently own?
For most people, their home is their biggest investment, so they need to use the equity built up by that property when buying another one.
How to access your home equity
If you put a large down payment on your home when you purchased it, have been in your house for many years or have paid for major renovations, you may be able to leverage a home equity line of credit or a bridge loan.
A HELOC is a loan set up as a line of credit. HELOCs typically have variable rates and a draw period followed by a long-term repayment period. A bridge loan is a short-term loan, secured by your existing home, that typically has a higher interest rate and a shorter repayment period.
If you have enough equity in your home, you may be able to use one of these options to purchase a new home before selling. Of course, this isn’t without risk, and it will be very important to get your current home on the market and in tip-top shape to sell so you aren’t left carrying two mortgages.
Sell, then buy
Maybe you bought a year ago and don’t quite have enough equity for a bridge loan or a HELOC. Maybe it’s just too much of a risk to hold two mortgages. If this is the case, an alternative option is to first sell your home and then purchase.
The drawback? Moving twice is no fun, and depending on the market and inventory, it could take a while to find your next home.
Sell with an extended closing period
If moving to a temporary rental or staying with family and storing your belongings isn’t an option, an alternative is to list your house and ask for an extended closing period and a post-settlement occupancy, or “rent-back.” A longer closing period would allow you to look for a home while minimizing the risk of holding two mortgages.
Part of this strategy includes the rent-back option that would allow you to live in your home while finding and closing on a new house. In this situation, you sell your house and use the equity to purchase a new home. Then, the new owners rent the home back to you. The rent rate is typically the new buyer’s PITI — or principle, interest, tax and insurance. However, in a seller’s market, the buyer may offer a lower rent rate or no charge at all.
One word of caution: The maximum period of time for a rent-back is 59 days. Otherwise, it might appear that the new owner purchased an income property and violated lending requirements. Another risk: If you do an extended closing, you may find a house sooner than anticipated and could run into issues with trying to access the equity in your current home.
For example, Leigh and Lyle were downsizing to a condo after retirement. They wished to use the proceeds of the sale from their family home for their purchase. They were able to negotiate a 60-day closing period on their existing home and use a 59-day rent back, giving them nearly four months to find, purchase and move into their new home.
The idea of leaving a home you love when you haven’t found your next home is stressful. It is important to work with a real estate agent you trust, who understands the market, who will partner with you, listen to you, understand your needs and walk you through all of your options. A realtor with local market knowledge can help you navigate your situation and guide you through the process of both selling and buying your home.
The writer is a realtor at McEnearney Associates, Inc., a local real estate brokerage. With more than 35 years of combined experience and daily immersion in the market, the Jen Walker Team is able to guide sellers and buyers through the real estate process. To learn more and to contact Jen, visit www.jenwalker.com.