Here are five ways to finance your next home before selling your current one
Chances are the first home you buy won’t be your last.
In 2021, Realtor.com reported that the average American homeowner tends to stay in a house for about 10 years before they sell; according to the National Association of Realtors, that time frame can vary anywhere from six to 18 years, depending on the location.
It takes a lot of logistics, coordination, and planning to buy your next home while selling your current house. But there are several different options available to you when you need to sell your current home to afford your next one. Here are 5 options to consider to make the buying and selling process a lot easier.
What you’ll learn:
- How to know if you need to sell your current home before you buy a new one
- How to finance a down payment when you haven’t sold your current home
- The difference between a traditional refinance and a cash-out refinance
- The pros and cons of a sale contingency
- The pros and cons of a rent-back agreement
- The difference between a home equity line of credit and a bridge loan
Do I need to sell before I buy?
Before you get too far into the process of buying and selling, ask yourself one question: Do I need to sell my current home before I buy my next one?
Make no mistake about it, many people do need to sell their home first in order to have the cash needed to make a down payment on their next home. But that comes with a number of drawbacks—you’ll need to find a place to live while you house hunt, and you’ll be at the whims of the market when you’re pressed to buy your next home quickly.
When you buy before you sell, you can freely explore the market without worrying about timing and whether or not the dream home you find will still be available once you have the cash in hand to make an offer. Buying first also means you can stay in your current home while you house hunt, without the need to include a rent-back agreement or sale contingency in your sale or offer.
But of course, not everyone can afford to buy first. Traditionally, you could end up juggling two mortgages while you try to sell off your first home, plus you would still be required to come up with the cash to make a down payment. But there are companies, lenders, and brokerages out there that can help you buy before you sell, if you choose to go that route.
We dig into the pros and cons of selling before buying here, so give it a quick read to weigh your options.
What are my options if I choose to buy before I sell?
You have several options when it comes to financing your next home so you don’t end up couch surfing at a friend’s house while the contracts close or, worse, having to move twice.
The length of a traditional home mortgage in America is 30 years, but since the average homeowner stays in their home for about a third of that time, it’s likely you’ll be ready to move on before you’ve paid off your current home.
It’s also likely that the mortgage rate has changed since you bought your home. That’s where refinancing comes in handy. To refinance your mortgage means rewriting your current mortgage by taking out a new loan for the current value of your home with new terms, rates, and conditions. You can make the terms longer or shorter, you can lower the interest rate, you can even switch from an adjustable-rate mortgage to a fixed-rate loan. Read our beginners guide to refinancing a mortgage here.
A cash-out refinance is similar to a traditional refinance, in that you will get a new loan for the new, often higher value of your home. The bank will provide you a loan for the appreciated value of your home; since that amount comes out to more than the original loan, you keep the cash difference and pay the total back as you were doing for your original mortgage. In essence, you’re receiving cash for the amount of money your home has appreciated since you purchased it. With home values increasing—with the National Home Price index hitting an all-time high in 2021—that may be enough for a down payment on a new place.
That said, a cash-out refinance is not right for everyone. It comes with a few requirements, including owning at least 20% equity in your home, good credit, and a debt-to-income ratio of 43% or less.
A sale contingency makes the offer you make on your next home connected to whether or not you’re able to sell your first home in time.
Generally, a sale contingency will give you anywhere from 30 to 60 days to find a buyer for your current home. If you do, great! Both sales go through and everyone’s happy. If you don’t though, your offer on the new home is voided and the seller may move on to the next offer on the list. It’s a let-down, yes, but at least you’re not financially on the hook for a home you can’t afford.
Sellers don’t always love offers that include sales contingencies, because it can add both time and an element of unpredictability to the closing process. In today’s competitive market, when homes are selling quickly in fierce bidding wars, sellers may opt for an offer with fewer, or even no contingencies in place.
Want to know more about crafting a strong home offer? We have tons of tips here.
The housing market has become especially competitive in recent years. At one point, in 2020, “over 70 percent of home listings saw a bidding war,” according to Fortune. While that can be great news for anyone looking to sell, it can make the timeline for buying less predictable.
A rent-back agreement could be a good option for anyone who needs a couple of extra months to buy a new place after the sale of their current home closes. With a rent-back agreement, you sell your home and the new owners agree to rent it back to you for a short period of time, usually a month or two.
To make the rent-back option appealing to buyers, you’ll probably have to lower your sale price or pay an agreed-upon rent to the new owners while you live there. But given that the market is so competitive—and, as of last year, more than half the homes in the U.S. are selling for over the asking price—it may not be a huge financial hit.
The rental contract will be very similar to what you’d see when renting any other property. The new owners may ask for a security deposit to ensure the home is kept in good shape while you’re there, and they could charge extra fees if you’re late with rent or end up staying longer than the agreed-upon time. It’s also generally a good idea to secure renter’s insurance for this period.
How much time a seller plans on staying is also an important factor for both seller and the buyer. According to Consumer Reports, if a seller rents back the home for more than 60 days, the buyer’s lender may consider it an investment property and charge them higher interest.
Home equity line of credit (HELOC)
A HELOC, also referred to as a second mortgage or an additional mortgage, is a line of credit that you borrow against the equity of your house.
While HELOCs can be used for any kind of purchase or expense—school tuition, medical expenses, home repairs, etc.—the money can also be used towards a downpayment on a new home.
HELOCs are different from a traditional home loan in that they work more like a credit card: you only have to pay back what you use, when you use it. Think of the amount of equity in your home as the credit limit of your HELOC: you can borrow money from that equity and only pay interest for what you use. When you take out a traditional home loan, the clock starts ticking—and interest starts adding up—the second2 the money hits your account.
HELOCs are best used in short-term situations, because their interest rates can fluctuate with the market. Another serious downfall to be aware of is that defaulting on your HELOC might mean you could lose your home.
Flyhomes has additional information about the pros and cons of HELOCs here.
Like a HELOC, a bridge loan is a loan you take out against the equity of your current home, and is primarily intended to be used for short-term financing.
A bridge loan, as the name suggests, is specifically intended to bridge the gap between buying and selling a home. Because it’s a loan taken out against your current home’s equity—and it’s likely your current home has gone up in value—the typical bridge loan will not only cover your current loan, but leave you with enough money for a down payment on a new house.
These loans are usually only good for six months—though they can sometimes be extended for up to a year — so instead of making monthly payments, you’ll just pay off the bridge loan in full, as soon as you sell your previous home.
So what’s the catch? Well, bridge loans often come with high interest rates. According to The Truth About Mortgage, they can be double—or higher!—the interest rate of a typical home loan.
Flyhomes Buy Before You Sell
As stated in the beginning of this article, lenders, brokerages, and other real estate companies are coming up with ways to help people buy and sell at the same time. With Flyhomes Buy Before You Sell, for example, Flyhomes pre-underwrites your mortgage, then finances your short-term loan so you can make a cash offer on your next home, move in quickly, and refinance into a long-term mortgage within weeks—not months.
How do I know which option is right for me?
The best thing you can do when looking to buy a new home is research. The current housing market is hot—homes are selling quickly and, in some cases, for well above the asking price. Before you get swept up in the frenzy, get familiar with your options.
Still feeling a little lost? It’s free to talk to one of our real estate experts! Start here to learn more about buying your home before you sell.
About the Author: Megan Seling is an author and journalist who has been writing about music, culture and politics for more than 20 years for outlets including The Stranger, Nashville Scene, Rookie, Paste, and more. She currently lives in Nashville, TN, with her husband, Robby, and their dog, Johnny Waffles.