By Chad Taylor
It is most common when a homeowner decides they need to purchase a new home that they sell their current home first and then go out and find their new home. But why? The answer is because that is the way it has always been done in the past. And because most homeowners need the equity from their current home to purchase their future home. So, in turn, they must sell their current home first, right? Wrong.
At our team meeting this week, we were identifying the reasons why some homeowners are not taking advantage of the current seller’s market even though a move is inevitable for them. Doesn’t it make sense to sell now instead of waiting? The consensus was that the number one reason for not selling today is the fear that a seller’s home would sell really fast. Seems like a great problem for a seller, right? But the real fear is not having a home to purchase when they do sell. The fear of being homeless, moving in with in-laws, or getting an apartment is paralyzing for some. So what is the solution?
In some cases, the solution may be what is called a loan recast. A loan recast is when a homeowner is approved for a loan without the sale of their current home. The homeowner then moves forward with purchasing a new home, again non-contingent upon their current home sale. A best practice would be that once a contract is in place on the future home, the homeowner would then put their current home on the market and get it sold as well. A loan recast allows the homeowner to close on their future home and then recast the loan once their current home closes and apply the equity earned from the sale to the new home loan. No, this is not a refinance or a bridge loan. Bridge loans and refinances both require a new appraisal to be completed and can involve double closing costs.
The reality of choosing to go this route is that you must be able to get pre-approved for a purchase without the sale of your current home. For some, this is a scary thought. Two mortgages! I don’t want to pay two mortgages! Well you shouldn’t have to. Let’s remember the original fear that we identified. It was that a homeowner’s current home would sell too fast. So why the fear of two mortgages? In a seller’s market, homes that are priced fairly and conditioned well will sell quickly. That is that. Mike Miles with Fountain Mortgage recently said it this way, “The current supply (low) and demand (high) can provide some insulation against the risk of having to make two mortgage payments.”
Here are a few additional benefits to a loan recast:
- All original loan terms stay with the recast. A recast allows a homeowner to capitalize on today’s low interest rates and then maintain those same terms after they have recast the loan. Unlike a refinance, a recast eliminates the fear of refinancing at a higher interest rate further down the road.
- The rate is the rate. The interest rate on a loan to be recast is the same as any other purchase loan in today’s market.
- Time is on your side. When a homeowner sells their current home, the closing date is often times negotiated with the buyer. If the buyer is in a lease which is ending very soon, they may ask for a 30 day closing. If the seller accepts, this would not allow much time for the seller to find a new home, get it under contract, inspect it, appraise it, and so on. Conversely, if you purchase your future home first and then sell your current home, you can adapt to almost any closing date scenario. Even a cash purchase that closes in two weeks. Imagine the stress that this takes away from the sale. Time is also on your side when you make your purchase. In a competitive situation, you can allow the seller to determine their preferred closing date without any fear of lining it up with the sale of your current home. Again, the recast allows you the flexibility to adapt and compete.
- Just this last week, we helped a great client of ours purchase the home of her dreams using this exact loan product. All the while she was following our program to prepare her current house for the market. Once she was under contract on her future home, we put her current home on the market that next weekend. Her home went live on Friday and by Saturday night was under contract. She knew that her current home would sell quickly, however, she was afraid that she wouldn’t be able to find a home that she would love. By purchasing first, she stayed in the driver’s seat on both her sale and purchase. And, by the way, we lined up her closing dates so she will not have one month of double mortgage payments.
If you would like more information about a loan recast program, please email or call me directly. You can also reach out to Mike Miles with Fountain Mortgage as well. We are here to help!