BUYING A HOME TO SELL

By Tricia Morris,
President, Premiere Mortgage

The economic news continues to be generally good, yet mixed. Mortgage rates keep bouncing around after dropping to the lowest rates in 40 years in June 2003. The Federal Reserve has been making statements that indicate it is getting the market ready for tighter money, but not anytime soon.

The possible increase in interest rates is spurring many homeowners to think seriously about making a move now by selling their home and moving up to another. It is worthwhile to note that when interest rates rise it can significantly slow home sales. When rates are low, it’s possible to move up to a better home at less cost and to sell your existing home into a larger group of potential buyers at a good price.

If you have made the decision to sell, now you have to decide how to do it. Do you sell your existing home first, or do you buy another home first and then sell? To sell first means that you can avoid owning two homes as the market changes. In Hawaii, where the market is strong and prices are rising quickly, the risk can be in not finding a new home in enough time and moving into a rental until you are able to complete the process.

Buying first gives peace of mind as to where you are going to live, but there is the risk inherent in not knowing the price your previous home will sell at, or how long it will take to sell. The other aspect to consider—will you need the equity from your existing home to make the purchase work on your new home.

If you decide to buy first, one approach to this problem is to obtain a bridge loan on your current home. For example, you may wish to purchase a $650,000 home and have savings that allow you to put 10 percent down on the purchase price. After reviewing your financial situation with your mortgage broker, you may decide that you do not want a mortgage larger than $400,000. That means that you would still need to come up $185,000 to complete the purchase.

One strategy to follow would be to apply for a $185,000 second mortgage on the current home that could be paid off as soon as the home sold. In this type of a situation, we would recommend a low-interest-rate-adjustable mortgage (ARM) to keep the monthly payment as low as possible while both homes were owned. In this strategy it is also important to insure that the second mortgage does not have a prepayment penalty attached.

One tip to follow whenever selling and buying is to be conservative about the potential sale price of your existing home. That way in the end you will have more cash than you expected, and that’s not bad.

Premiere Mortgage has offices in Kihei and Kahana. Please contact Tricia Morris at 874-8800 or 665-8800 for a free consultation..

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