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Puget Sound Real Estate: How to Buy Before Selling
The NWMLS dropped their January data a couple days ago. Super interesting stuff! Here are some of the key insights:
- The number of SFR transactions that closed in January fell to a new 15 year low at only 750 closed transactions in all of King County. For context, we closed 784 transactions in January 2023; and 1,129 in January 2022.
- According to Freddie Mac, mortgage interest rates were .33% higher (on average) in January 2024 versus January 2023
- Despite fewer transactions and higher mortgage interest rates this past January, prices of single family residences rose 8.80% in King County, 4.43% in Snohomish County, 4.35% in Pierce County, and 12.31% in Kitsap County compared to last January. Overall, the median price of the 2,847 homes that sold on the 26 County NWMLS in January rose 6.22% year over year. FYI – At that appreciation rate, the price of a home will double in 11.5 years.
King County home prices have risen $68,752 in the last 12 months, and a staggering $219,325 since 2020 BC (before Covid). Honestly, if a global Pandemic followed by a multi-generationally high inflation crises can’t bring our market down, what can?!? We’ve been through a lot in the past four years, but Puget Sound Homeowners find themselves with more equity than they’ve ever had before. Lots of home equity is pretty amazing, but what do we do with it? …What if we want to buy a new home before selling our current one? …How do we access all that home equity to be used as down payment on a new home before we sell? Two options:
- HELOC
- Cross Collateral Loan
Ok, going the HELOC route is pretty straightforward. A HELOC is a Home Equity Line of Credit – It’s like a giant credit card secured by your home. It has a higher interest rate than a regular mortgage, but a much lower interest rate compared to a credit card because it’s secured by a house (credit cards aren’t secured by anything). Unlike a traditional mortgage, however, you only pay interest on the money you actually borrow. So, for example, if you take out a $250,000 home equity line of credit but only borrow $100,000 on that line, you only pay interest on the $100,000 (not the whole $250,000). So, if you decide to go the HELOC route, you would take out a home equity line of credit to access your current home equity, then draw upon that line of credit to use those funds for down payment on a new home. Once your departing residence sells, you would pay off the HELOC (and first mortgage) out of the proceeds of sale, and pocket the remainder. EzPz
The HELOC route seems pretty great… The problem with the HELOC option is that going that route can result in some very high debt to income ratios. That route forces us (the lender) to effectively preapprove a borrower contingent on three mortgages – the departing residence first mortgage, the departing residence HELOC, and the new residence first mortgage. Frankly, not all borrowers can qualify to carry three separate mortgages. So what then? A Cross Collateral Loan might be the ticket.
A Cross Collateral loan allows a borrower to use the equity in their current home to purchase a new home by obtaining ONE loan against the new home AND their existing home (combined). Then, when their existing home is sold, the principal balance of the new mortgage is reduced by the proceeds from the sale of their current home. When the loan balance of the mortgage is lowered, the payment will be lowered due to the mortgage being re-amortized over the remaining 30 year fixed term (No refinance required).
Here’s an example: Clients purchased their current home 10 years ago. That home is now worth $1.5M today with a mortgage of $430,000. The perfect home is listed at $2M. This program works by taking the combined values of the 2 homes, $1.5M + $2M = $3.5M. We can finance up to 65% of the $3.5M combined value, which is $2,275,000. The $2,275,000 can then be used to not only purchase the $2M home, but can also cover any closing costs, which means $0 out of pocket. Now, let’s assume this results in a loan amount of $2,030,000. When they sell their $1.5M home and net roughly $935,000 in proceeds from the sale (after paying off the $430,000 mortgage), the remaining proceeds can be used to lower the cross-collateral loan amount from $2,030,000 to $1,095,000.
Rates for cross-collateral loans are where you’d expect rates to be these days, but of course and as you know – you can refinance in the future if rates fall. Also a big bonus with the cross-collateral loan: There’s no timeline on when you have to sell the home!
Take it Home
Puget Sound Homeowners have never had more equity in their homes than they have now – but how do we use that to buy a new home if we want to buy before selling?!? The answer is either taking out a HELOC on the current home if we can qualify with all the mortgage payments, or utilizing a cross-collateral loan if debt to income ratios prohibit us from going the HELOC route. Every situation and borrower is unique, so please never hesitate to give me a call to discuss what option might be best for you or your client.
