Buying a new home is exciting. But what happens when you find the home of your dreams when you’re already paying a mortgage on another one?
Below are some of the typical options that people consider when purchasing a second home or buying a house while trying to sell their current one. Whether you’re buying your next vacation home or transitioning from one house to another, read on to learn about your options.
Purchasing a Home When You Already Own One
You may be thinking about buying a second home to use seasonally or as a vacation property. Many people who can afford to pay for two homes find tremendous benefit in using one as an investment or an enjoyable place to get away to each year. To ease the financial strain a second home can create, most homeowners with multiple properties choose to either consolidate their mortgage or make a profit by renting their secondary home when they’re not using it:
1. Rent Out One of the Homes to Vacationers
If your family is only using one home at a time, you may want to consider renting out the second property when you’re not using it. Beachfront properties, ski cabins, and other vacation homes are highly sought after during peak vacation season, and many multi-property owners make a profit by renting out their unused homes to vacationers for a week or more at a time. Just make sure the dates you’re offering your second property for rent won’t conflict with the times you want to use it for yourself.
2. Get a Consolidated Mortgage
If you have the financial means to keep your current home and buy a second, consider getting a second mortgage large enough to consolidate the mortgage of your first home. A consolidated mortgage combines two separate home loans into one monthly payment, which makes it easier to keep track of monthly bills and could help you obtain a lower interest rate.
This consolidated mortgage will specifically combine the two loans from your current and new homes, so keep in mind that any existing mortgages would be counted toward your income-to-debt ratio if not paid in full before closing on your new property. We do not provide consolidated mortgage loans at PSECU.
Buying a House While Selling Your Old Home
From an impromptu job offer to a new addition to your family, you might find yourself needing to purchase another home quickly for many reasons. The right option can make this transition virtually stress-free — even if you haven’t yet sold your old home. Here are several common ways homeowners handle the overlap between buying a new house and selling an old one:
1. List Your Home Competitively with the Help of a Real Estate Agent
The first step in selling your home is listing it competitively, so it’s likely to be appealing to many prospective buyers. A real estate agent can help you sell your home faster by performing market research, pricing it correctly, and listing it online where it will attract the most potential buyers.
2. Make a Contingency Offer
If you’ve found the home of your dreams but need to sell your current home to make a down payment, you might consider making a contingency offer — an offer on a home that informs the seller that you’d like to buy their house as long as your current one sells first.
The contingency addendum — which is signed by both you and the seller — outlines how quickly you need to list your current home and how long you can take to sell your home before the seller can terminate the agreement.
As part of accepting a contingency offer, the seller has the right to include a “kick-out clause,” which allows them to continue marketing their home while they wait for you to sell yours. If they receive an offer from another buyer without a contingency, the seller is required to notify you so that you can either terminate the contingency addendum and keep your contract valid or terminate your offer on the property.
A contingency offer is a good way to avoid financial risk if you think you may have trouble selling your home. But keep in mind that it could also prevent a seller from accepting your offer, especially in a competitive market.
3. Rent out Your Old Home
You can also choose to rent out your old home to cover the mortgage on it or earn extra income to cover your new mortgage. You can also consider offering a lease-purchase option.
In a lease-purchase contract, a portion of each month’s rent from the tenant contributes to a down payment on your old home. At the end of the specified renting period, the renter is obligated by contract to buy your house.
Be careful to review the contract’s wording — a “lease-purchase” contract obligates the renter to buy your home, while a “lease-option” contract allows the tenant the option to walk away from the house after the lease expires. If the renter chooses to leave at the end of their lease on a lease-option contract, you’ll once again be responsible for selling the property.
4. Use a HELOC or Bridge Loan for a Down Payment on Your New Home
Since most people don’t have the finances to pay for two homes at the same time, many find that a home equity line of credit (HELOC) or a bridge loan is ideal for their situation. Here is a closer look at these two options:
- HELOC: Rather than borrowing a fixed amount, a HELOC allows you to make several withdrawals within the draw period up to your maximum credit line. That way, you can draw the amount you need to close on your new home while waiting for your current one to sell.
- Bridge Loan: This short-term loan covers the interval between buying your new home and selling your current one. A bridge loan can be a good solution for many homeowners, especially if you’re confident your home will sell quickly. However, it can be hard to find a financial institution that offers one. PSECU does not provide bridge loans.
Are you wondering if you can use a HELOC for a down payment on a new home? We can help answer questions about the home loan options we offer and make recommendations based on your unique circumstances.
Because no two homeowners have the same circumstances or needs, we’ll help you find the mortgage that’s best for you as you add a mortgage or make the transition from one home to another. Contact us today.