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- If you're moving into a more expensive house, remember that utilities and other expenses may be higher.
- If renting isn't an option, your real estate agent will be able to help you find the neighborhood for you.
- You may have to pay two mortgages at once, but that's a manageable problem if you plan ahead.
- Reduce your risk when you buy before you sell with a guaranteed backup offer from Calque. Get your quote today.
With the average mortgage rate for a 30-year fixed-rate home loan currently over 6% and the price of a house increasing rapidly, now is really a great time to learn to love the home you have — at least until rates drop again or the housing market starts to cool. However, sometimes you don't have much of a choice, whether that's because you're desperate for more space or you need to move for work.
So, what do you do if you need to move right now? And how do you handle the transaction if you need to buy another home before you sell your current property? Financial planners have three tips for anyone thinking about buying a new house before selling their current house.
1. Remember, an upgrade comes with hidden costs
If you're hoping to relocate in order to have a larger home, a property with more upgrades, or a more spacious yard, you need to consider the costs of maintaining a larger, more expensive property. And remember, these added costs are heaped on top of higher costs brought on by today's steep mortgage rates as well.
While how much interest you pay on a mortgage depends on your rate and how much you owe, even a few points up or down can make a huge difference in your monthly housing payment — you can see the dramatic difference with a mortgage calculator. For example, a 30-year fixed-rate mortgage for $400,000 at 3.5% requires a $1,796.18 monthly payment including principal and interest. Jack that rate up to 6.5%, however, and the monthly payment increases to $2,528.27 with principal and interest only.
In addition to a bigger mortgage payment than you would have had a few years ago, financial advisor Glen Hedrick of Old North State Wealth Management says you'll want to consider your ability to pay higher utility bills, property taxes, and homeowners insurance premiums, too.
"You also need to account for the costs of moving into a new house and selling your old one, which may include closing charges, relocation expenses, and real estate agent commissions," he says.
2. Work with a real estate agent who knows your new neighborhood
Certified financial planner Brandon Juodikis of BRJ Wealth Management says families who are planning to move for a job may want to consider renting instead of buying another home — especially if they may only be in the new area for a few years at most.
"Compare rental prices, mortgage payments, and the expected length of stay to make an informed decision," he says.
If renting is off the table, though, you'll want to consider the cost of living in the new area you're considering and how it compares to the cost of living where you're at right now. If you are planning a move to earn more money but the cost of living is significantly higher in your new town, for example, moving for a pay increase may not make any financial sense.
If you have kids, Hedrick says you'll also want to consider the quality of the school district you'd be moving into.
"Work with a real estate broker or agent that is knowledgeable about the neighborhood you're interested in," he says. "They can guide you through the procedure, assist you in bargaining for the best deal and offer insightful advice."
3. Have a plan for paying two mortgages at once
Whether you decide to move to get more space or to move up the career ladder, you may find yourself in a position where you're buying a new home before you sell your old one. Hedrick and Juodikis agree there are major advantages to doing so if you can swing it in a financial sense. Hedrick points out that moving over time and having flexibility in moving dates is a major upside.
Juodikis also says buying before you sell gives you time to settle into your new home and make necessary preparations without the pressure of vacating the old one immediately. You may also have time for renovations on the new home before you move in, or in the home you're selling to get it in the best possible shape.
That said, there are notable downsides that come with buying a home before you sell from a financial standpoint. First, having enough savings for at least the down payment on the new home is important, and you'll generally need to have at least 5% to put down with a conventional mortgage.
"Other items to consider are having an emergency fund for unforeseen expenses," says Hedrick.
You also have to be able to qualify for two mortgages at once in order to buy before you sell, and this may not be possible if you already have a high debt-to-income ratio. There's also the prospect of having to keep up with two mortgage payments at once if you move into your new home but it takes several months to get your old home to the closing table.
Hedrick says that another option called a bridge loan can make the process work. A bridge loan is a short-term loan that helps "bridge the gap" when you're buying a new home before selling your old one, and it typically lasts for around one year.
That said, bridge loans tend to come with higher interest rates than traditional mortgages, and having one can still leave you making two mortgage payments at once (at least until the bridge loan term ends).
When you're planning to buy a new home before you sell your old one, the financial moves you make now can make quite a difference. To get the best rates, Hedrick says to review your credit score, pay down any other outstanding debt you have, have enough for a down payment, and get pre-approved for a mortgage as soon as you can.
Next Steps: Calculate how much equity you could convert into a down payment on your next home if you buy before you sell with Calque.