The recent rise in interest rates is causing many homeowners who have outgrown their current home to seriously consider making a move. Some own a home that's too small; others have school-age children and want to move to a better school district. Whatever prompts the desire to move, the goal is the same: make the move before interest rates increase further.
One advantage of making a trade now while rates are still low is that you can afford a bigger or better home than might be possible when rates move higher. Also, lower rates make your home affordable to a larger pool of buyers, which can result in a faster sale and potentially a higher price. When interest rates rise it can dampen home sale activity, sometimes significantly.
The rationale for making a trade move now is a good one. Figuring out how to make it work is another matter. The question of whether to buy first or sell first plagues most repeat buyers. There are pros and cons to both approaches.
Buyers who sell first know exactly how much money they have for a new home. They also avoid the risk of owning two homes in a changing market. However, they don't know where they're going to live or when they'll find a suitable home to buy. In a worst-case scenario, they won't find a replacement home quickly enough and will have to move to an interim rental, which can be very inconvenient.
If you buy first, you know where you're going to live and when you can move. But, the financial risk is higher because you don't know what price you'll get for your old home, or how long it will take to sell. Nevertheless, most repeat buyers prefer to buy first than to sell first. The trick is to figure out how to make it happen if you need the equity from your current home to buy the next one.
Recently, a trade-up buyer used the following strategy effectively. She had enough cash in savings to make a $75,000 down payment, which was equal to 10 percent of the $750,000 purchase price. After consulting with her financial advisor she determined that she wanted to have a mortgage on the new place of no more than $450,000. So, she was short $225,000 until she liquidated the equity from her current home.
HOUSE HUNTING TIP: To make up for the shortfall, her real estate agent suggested that she apply for a $225,000 second mortgage on the new home that could be paid off as soon as her current home sold. For the second mortgage, her mortgage broker recommended a low-interest-rate adjustable-rate mortgage (ARM) to keep her monthly payment as low as possible for the period of time that she owned two homes.
Although she preferred fixed-rate financing, it made sense to take advantage of the lower ARM payments for the short time that she'd keep the second loan. You must be able to qualify financially in order to use this strategy. And, if you do use this approach, make sure that the second mortgage doesn't have a prepayment penalty.
Some buy-first buyers put a home equity loan on the home they're selling to generate cash for a down payment if they don't have enough savings for a down payment and closing costs.
THE CLOSING: To minimize the risk of buying first, be realistic about the probable selling price of your current home. It's better to estimate on the low side and walk away with more cash than you expected than it is to be caught short of the money you need.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers," and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
Copyright 2003 Dian Hymer
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