10 — Say you saw it in The Real Estate Browser of Lynchburg — Volume 8 Number 10 www . LynchburgRealEstateBrowser . com
Leveraging Your Existing Equity by Dan Vollmer , Associate Broker , ReMax 1st Olympic
Many buyers today may not realize an important option available to them when looking to sell one home and move up or downsize into a new home . In the ‘ I have to sell to buy ’ scenario , most buyers forget the option of taking out a home equity line of credit ( also known as a HELOC ) on their existing home .
Step one is determining how much equity the buyer has in that property . Most banks will allow the home owner to access up to 85 % of the equity in their home ( check with your bank for more specifics ). But let ’ s just say the property would appraise for $ 250,000 and the balance of the current mortgage is $ 125,000 . That would give them an additional $ 125,000 worth of equity , of which they should be able to access $ 106,250 .
Step two is looking at all financing options for the new home . If the buyers have access to $ 100K + in equity , and maybe have another $ 25- $ 30k in savings , that could be a significant down payment on a new home . Depending on other factors - such as debt , income and credit scores - the buyers could well be able to use that equity , as well as some cash savings , as a downpayment that would make the loan on their new home both affordable and within the range for their qualification .
Following this scenario - once the buyers have secured a HELOC , they then borrow that money against their existing home and use it as a down payment on the new house . In some instances , depending on the equity available and the new home ’ s purchase price , there may be enough equity to cover the entire purchase , making them essentially cash buyers !
Once the buyers close on their new home , they will have several payments : mortgage payments on their prior home ( which , under this scenario , they have not yet sold ); mortgage payments on their new home ; and interest-only payments on the equity they have borrowed for the down payment .
The final step is to sell the first home , at which point the buyers pay off both their existing mortgage , as well as the home equity line of credit . This is basically a way for the buyers to access the equity in their existing home without having sold it . They are essentially borrowing money from themselves , paying interest only payments to their bank , and ‘ repaying ’ the funds at the time they eventually sell their home .
There are many factors to consider , and this option does not always work for every ‘ sell and buy ’ situation . But for folks who have been in their homes for awhile , or who made a significant down payment when they bought , its worth pursuing as an option , in the event they are eager to make the move and don ’ t have the time or inclination to wait out the sale of their existing home .
Questions , comments , or have an idea for a future article ? Email me at dan @ DanVollmer . com .