How to Use Equity to Move to Your Next Home
I’m here to tell you it’s time. You’ve owned your home for a while. Years, in fact. In that time the real estate prices have been increasing and your equity has expanded. So now it’s time to move to a house that will fit your equally growing family, or shed that space that you don’t need any more.
If this description fits you then you may be in a perfect position to move to your next house using the equity from your current home. But how do you do that when your down payment funds are locked up in your home. And how do you know if it’s the right time to move?
Let’s answer the second question first. Home prices in the Portland metro area continue to be on the rise. The inventory squeeze in Portland and the predicted future influx of population makes the chances of a pricing downturn minuscule. What does this mean for you as an owner? It means that though the sales price of your current home will rise, the acquisition price of your next property will also rise. Add to that the creeping increase in interest rates, and my recommendation will, in 99% of clients, be to move now rather than wait. Hesitation won’t work to your advantage.
If you’ve decided to move, but need to use the equity from your current home to purchase your next. How on earth do you manage that? Should you start with selling your current home or buying your next before selling? Both have risks and rewards, and in this post I’ll quickly review both.
Many people choose to purchase their new home first. Some buyers with good credit and income - and a lot of equity - are able to buy a new home before selling. Using a home equity loan, as allowed by your lender, will allow buyers to pull money from their current home and use it for a down payment for your next home. The advantages of this are obvious, as they allow buyers to look for a new home on their own time frame, without the pressure of selling their home first. They also eliminate the need for financing contingencies beyond the standard appraisal, which all lenders require. This means that buyers are able to remain as competitive as possible in what continues to be a seller’s market. The risk is that buyers could end up with two mortgages for an extended period of time, or their current home may sell for less than expected, putting owners in a financially tight situation.
Buy/sell using a contingency
Another option is to write a clause into the sales contract making an offer contingent on the sale of a buyer’s current home. This conditional sale allows a buyer to make sure they can secure a new home before selling their current home, eliminating most of the financial risk. It's also often possible to coordinate closings so that the buyer can move directly into their new home, eliminating the need for moving twice or finding storage.
However, as long as it remains a seller’s market, the stars must align just right for this option to work. You and your Realtors must find a seller willing to entertain a contingent offer, and if a competing buyer makes an offer that is not contingent on the sale of their home it’s difficult for the contingent buyer to win out. It also puts pressure on the person with the contingent offer to locate and secure a new home in a short time-frame once they have an offer on their current home. And if you write an offer on a home before securing an offer on your current property, the offer remains “bumpable” – meaning that someone else may write an offer on the home and the seller may opt to choose it unless the contingency can be removed. It’s a complicated approach with various moving parts that need to be timed right (and probably deserves to be examined in more detail than it is here). The contingent offer option can work, but a buyer may have to be quite patient before landing an offer that works.
For most clients, this is the option I like best. Have you ever heard the phrase, measure twice, cut once? How about sell first move twice? I just made that up, but it’s what I often recommend. What?! Move twice?! Well, hear me out. Selling first removes the financial risk associated with carrying two loans. It allows a homeowner to know exactly what they’ll net upon the sale of their home, which may effect their down payment for the next. With the abundance of available moving and storage companies, people who sell first will often store their belongings and find a short term corporate or Airbnb rental while they search for a new home. Some people even have fun with it, exploring a new part of the city that they may not have spent time in before.
This approach removes the pressure of finding a home in a limited amount of time, as might happen with a contingent sale or when someone has the financial pressure of carrying two loans. This, ultimately, is the biggest advantage. Clients who have gone this route invariably have said that the stress of moving twice was more than offset by knowing exactly how much they could afford and the ability to take the time to find the right new home – not settling for a “just OK” fit – without feeling under the clock.
If you want to explore these options, or tell me that it’s crazy to think you’ll sell first and move twice, give me a call or come in to talk and we'll find the right approach to getting you into your new home.