A home is one of the most consequential purchases many people make in their lifetime. Between the down payment, monthly mortgage payments, and ramifications associated with defaulting, the stakes are certainly high. And those stakes are compounded if you choose to buy a second home. But thanks to historically low mortgage and refinance rates, it’s not a bad time to shop around for your (next) dream home.
If you own your home but are in the market for a second, here are four things you should consider before buying or selling anything.
Sell first, purchase later
Generally speaking, selling your first home before buying a second is ideal. Carrying two mortgages for any length of time is a risk and a heavy financial burden. And moreover, in a competitive market, the pending sale of your first home can actually hurt your buying chances, explains Ashley Noethe, a realtor with Weichert, Realtors – The 515 Agency.
To get a property off the market sooner rather than later, Noethe recommends freshening it up with easy upgrades, such as paint, and being judicious when it comes to valuation. “Don’t overprice your home just because it’s a seller’s market, as this could result in more days on the market,” she says. “And while you should make your offer competitive, consider carefully before waiving any important contingencies such as the inspection or appraisal.”
Beware of home sale contingency
“If you’re buying a new home and need to sell your current home in order to obtain a mortgage, you’ll need to include what’s called a home sale contingency in your offer. This simply states that you can’t settle on the new one until your current home has been sold,” says Molly Reed, a realtor with Red Cedar Real Estate. “In today’s seller’s market, home sale contingencies make your offer less desirable to sellers.”
If you do have a contingency attached to your offer, there are a few things you can do to reassure the seller. For instance, it can help to show that you have a viable offer on your first property and/or have set a closing date.
Consider your options for a line of credit or short-term loan
“With the strong appreciation we’ve had over the last several years, the equity you have in your current home can be applied to the down payment on your next home to help you afford a larger home, or alternatively, downsize and reduce your mortgage payment,” says Noethe. “If you end up buying a new house before you’ve sold your current residence, talk to your lender about financial options such as a HELOC or bridge loan for the down payment.”
To qualify for a bridge loan or a home equity line of credit (HELOC), you will need to have strong credit, low debt-to-income ratios, and proof of stable finances. And with both loan types, you will need to carry multiple mortgages until the first home sells.
Don’t forget to look into any fees
“In many cases, second homes are condos. This can be a great option, because they are low maintenance and generally have nice amenities to enjoy,” says Reed. But she cautions homeowners to find out about any condo fees, which can add up when combined with mortgage payments, insurance premiums, and taxes.
“You’ll also want to make sure that you review any condo and HOA rules, regulations, and bylaws,” she says. “Do you have a pet? Do you intend to rent out the home when you’re not there? Do you see yourself grilling in the summer? These are all common items that you’ll see restrictions on with condominiums.”