Buy first, sell second: The mortgage option that makes it possible

Key insights:

• Many homeowners need the profits of their existing home sale to fund their next property — but they are worried about not being able to find a new home to purchase.
• Homeowners with equity may be able to take advantage of a loan option that allows them to buy first and sell later.
• By using their home’s equity, they can obtain a second loan with the best terms and no mortgage insurance.

As a homeowner, you likely know that it’s a great time to sell. Home prices have been rising for several years, and the median home price in the Twin Cities market has reached $332,500.

If you plan to re-enter the market as a buyer, you also know that in this tight market, it can take longer than desired to find the right home. And while some folks in this situation pursue transitional housing, it’s common (and understandable) to wish for a more streamlined process.

While you may assume that you have to sell your home first, and buy second, that's not your only option. There are also loan solutions that allow you to fund your next home by tapping into your existing home’s equity.

Home equity loan solution

As housing prices have increased greatly over the last few years, so too has the average homeowner’s equity. This can mean that after a homeowner sells their home and purchases another, they are typically able to use their profits for a significant down payment on their new residence.

But what about when a homeowner wants to purchase a home first, before selling their existing residence? Without the profits from their home sale, they may not have a strong down payment to offer — which can make it difficult to obtain the best loan terms and to avoid paying private mortgage insurance.

Recognizing that the homeowner does have equity and finances they will be able to access in the near-term, banks now offer products that help consumers who are in this short-term position. “Piggyback loans,” as they are often called, allow homeowners to take out a home equity loan to apply toward the purchase of their new home.

Here’s how it typically works:

1. The borrower secures a loan, for their new residence, that is dependent on a 20% down payment. This allows them to avoid paying mortgage insurance in the future.
2. The borrower also secures a second “piggyback” loan, which draws from their home equity, to pay for part or all of the down payment on their new home*.
3. When the homeowner sells their existing residence, they can use the proceeds of their home sale to pay off the second loan.
4. The borrower now has a loan with the best available terms, that takes into account their overall financial situation.

It’s important to keep in mind that lenders need to minimize their risk with every borrower, so these options are not available to every homeowner. To determine your eligibility, get in touch with a home mortgage consultant who can advise you directly.

Take advantage of smart guidance

Today’s sellers understand that they are in a great position when they list their home — but they also rightfully worry about what happens when they re-enter the market as a buyer. If you wish to avoid this scenario, a home equity solution that allows you to buy first, and sell later, may be the right path for you.

Reach out to Edina Realty or your agent today to discuss this process in more detail.

*Not all buyers will qualify. Prosperity Home Mortgage, LLC does not offer financial advice. This information is provided for informational purposes only and does not constitute legal, tax, or financial advice.

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