A multitude of homeowners are in a less than desirable equity position, otherwise known as “upside down”, “underwater”, “negative equity”, etc. This presents a little problem in the concept of selling a home and transferring the equity to become a “move up” buyer. People feel stuck in their current home, but with a little creativity and determination, you can absolutely make the move and get on with your life and be better financially for it.
There are many reason why the need to move arises – up-sizing, downsizing, new neighborhood, reduce the commute, increase in income, whatever. But the main reason why right now would be a great time to move to another home is this: you’ll get rich! OK, that might be a little exaggerated, but increasing your net worth is almost a sure thing. I’ll explain.
The next home you buy will most likely be a long term home. You’ll be there a while, maybe even through retirement. You can buy that home with a ridiculously low fixed interest rate and never refinance again. There is the ever-present debate about whether you should have a mortgage for tax purposes and let money work elsewhere, presumably earning a higher interest rate than you mortgage is costing you. Or pay off the mortgage. There is a slough of evidence supporting both sides of this debate, but in the end, it is a personal decision to live debt free or leveraged. Sorry for the tangent – I better end it right here and save it for another blog entry. Back to keeping your current home and buying another one….
Simply put: Prices are down, rates are down, the rental market is very strong. Even if you can’t refinance your current home to drop the payment becuase you don’t have the necessary equity, chances are pretty good you can rent it out to cover the payment. Or at least get close. There are plenty of people who are selling on a short sale or just foreclosing that are good people who would make good tenants, but can’t qualify to buy another home for 3-4 years at least. They need homes to rent. Vacancy rates are at their lowest in years right now. Great news for landlords.
With the house rented and that payment covered, you can buy another home at what appears to be the bottom of the market – if we are not there it is close, especially in Utah. You can ride the appreciation trends up in the new house you buy and, of course, your current home’s equity will also increase. Now you have leveraged yourself for double the appreciation in the coming years. A sound strategy used by millionaires since the beginning of real estate ownership.
The two hurdles for homeowners wanting to employ this strategy are:
- Money for the down payment.
- Qualifying for both house payments.
The money for the down can be zero if you buy in a more rural area qualifying for the USDA Rural Housing loan as mentioned in my previous blog. Other options would require the minimum down payment of 3.5% for FHA loans and 5% down for Conventional loans. That money can be gifted, borrowed from your 401k, pulled out of equity in cars and other assets. If you use other sources, that money may have to be “seasoned” in your bank account for a few months.
Qualifying can be a little tougher to get around. The guidelines on this have changed recently for reasons too lengthy to explain here. The bottomline is this: if you don’t have 25%-30% equity in your current home or “departure residence”, even if the rents collected cover the payment, we still have to count the payment against you in your “debt ratio”. The new house payment and the old house payment and all other payments have to fall in the range of 45% to 50% of you total monthly income. That can be calculated in a few minutes over the phone with a qualified mortgage professional.