How to use equity on first home to buy a second home?
Currently live in the Bay Area have around $400K equity built into our home. But we need to upgrade to a bigger home as our family has expanded and we have outgrown this starter home. We have enough savings to make a 20% down payment on homes up to $2M, but we don't want to stretch ourselves too thin, so we want to sell off our current home after we move to new home and use the proceeds from that sale to keep our monthly payments reasonable on the new mortgage. Other than mortgage reamortization, what other options are there for us to use the equity from our selling our current home? I know that interest rates go down when you put more than 20% down, but in our case we will only have 20% at the time of purchase so will qualify for a rate at 20% down, but when we roll the equity from the first home sale later into our new mortgage as part of reamortization, it will only take down the monthly payments, but we will be stuck paying the higher interest rate. The fact that we won't get a better rate later after reamortization is giving me pause. Is there a better way to go about this and qualify for a lower rate that's offered for >20% down payment scenarios to begin with?
Look into a recasting mortgage. Basically after you sell your first home, you can pay down the principal of your second mortgage without refinancing and the loan will be recasted down to the new lower amount.
Yes. But that also keeps the interest rate unchanged after recasting. Ideally I'd have liked a lower interest rate after recasting as our equity in the home would be >20% which should qualify us for a lower mortgage rate than 20% down.
Actually jumbo recasting loans are very lucrative so rates should be low. We used Wells Fargo.
Find a creative mortgage broker that will structure a combination of loans, one a which will be a second mortgage in your old house.
Put an offer on the new house and in the meantime list your old house. It will sell in a weekend. Then tell your morgage broker that you'll put $800k down. We did this in November in Boston so you won't have any trouble in SF.
Staging a home and selling it within a week or two is a hassle with two small children in the house. That's why we want to move into the new home and then take a month or two to sell the older home and be patient with it instead of trying to accept the first offer we get if we only had a couple of weeks to sell it.
Outside of down payment, you probably won’t qualify for 2 loans at the same time and they won’t count rental income or that you’ll sell it when you live there. You need to have contingency or sell first
You can get a letter from a “tenant” and count 70% of the rental amount as monthly income to balance out your income to debt ratio.
When I tried to do this recently, all the lenders wanted to force me into a single loan for the full price of both homes minus my down payment + equity. That’s very expensive, because loan costs are based on the loan amount and I wasn’t planning on keeping my old house. Some independent mortgage brokers can get very creative to make the deal happen, so it’s worth having a conversation with a few of them. In the end, we just did a contingent purchase and everything worked out fine. The market is actually taking contingent purchases now, where a year ago they were laughed at.
TC/YOE?
Are you sure interest rate improves with down payment >20%? The improvement to your DTI once the first home is sold might make a bigger difference. Instead of just re-amortizing, your best outcome might come from fully refinancing once that home is sold.
I'll have to do the math when we get to that stage I guess and see which one makes more sense. Thanks.
You can take helloc but that’s gonna be more expensive than new mortgage of primary residence. Without knowing your TC and expenses it will be difficult to estimate if you can afford a 2M home. If you have lived in your current home for more than 2 years than you can just sell it tax free profit and use to downpay more of new home. You won’t get any benefit of down paying less since for tax purposes 750k mortgage is only deductible. So sell and use the money to buy new. This would make sure you aren’t stretching yourself. Or else wait till you have 20% down for new home and then rent your old home.
Thanks. Household TC is $440K. And like I said, we have $400K cash savings + another $400K in equity in the first home.
Curious why you have that much cash savings. I’d think you want a smaller savings and pay down the mortgage instead. What is your thoughts here?