Friday, July 6, 2007

Sooner or later, many homeowners will find themselves trying to buy one home while currently owning another. Whether you are facing a buyer’s market or a seller’s market, one side of your move is going to be a challenge. And if you don’t manage things carefully, it is possible to be stuck owing two mortgage payments.

Two years ago, it wasn’t as risky to put a contract on your next home while you owned another property. Homes in the Washington metropolitan area were selling quickly.

Back then, there was only a one-month supply of homes. Today, homes are selling slowly and the supply is up to four months.

“You need to be very careful,” says Frank Fannon, Alexandria branch manager for SunTrust Mortgage Inc. “Because if you get yourself into a double mortgage payment, you don’t know how long you might be stuck because you don’t know how long it’s going to take for your house to sell.”

Since the market is more challenging for sellers today, it’s important to price your current home correctly. Regardless of whether you use a Realtor, be sure to research the comparable home prices in your area in so you won’t overprice the property and cause it to be stuck on the market once you begin mortgage payments on your new home.

Mr. Fannon recently worked with a family who bought another property and listed their original Kingstowne home for $900,000. They received a contract for $880,000 but they turned it down.

Nine months later — after the market had cooled substantially — the sellers finally sold their home for $780,000.

The family also lost a lot of money on double mortgage payments and loans because they didn’t accept the $880,000 offer.

“You’re always going to be able to sell your house,” says Mr. Fannon. “The question is: At what price are you going to sell it? Every house can be sold in a week.”

If you have plans to buy your next home but have one to sell, too, there are some strategies to avoid holding two mortgages.

First, try to sell your current property first. If you do make an offer to buy before you’ve sold your current home, write the purchase contract contingent on the sale of your current property.

Try to push off closing at least 60 or 90 days on your new property to give you time to sell your old home.

Adding this kind of contingency clause to your offer might cause you to lose out to another buyer, but in the current market, buyers have the advantage. That means contingencies like these are becoming more common, more accepted by sellers.

Gary and Kelly Shenk bought a home in July 2006 without a contingency for the sale of their existing home. The new home is just three doors down from their existing home, near historic downtown Annapolis.

In April 2006, they put their existing home on the market before settling on the new property. Even though their existing home had been remodeled and was in a desirable location, it took 12 months to sell, causing them to pay two mortgages for nine months.

“We weighed all the pros and cons and we didn’t think it would be hard to sell our house — especially considering the market that we were in at the time,” Mrs. Shenk says. “We were prepared to hold two mortgages for four to six months, just in case.”

The Shenks wound up using their entire savings to pay the two mortgages and were in the process of writing an advertisement to rent their new home when their old home finally sold for about 10 percent less than the original listing price.

During the 12-month process, the Shenks received three contracts that fell through: One buyer reneged on his contract, and two other contingent contracts fell through because the potential buyers couldn’t sell their existing homes.

“You always get emotionally involved with the house that you want to buy,” Mr. Shenk says. “Looking back, we probably should have protected ourselves better and demanded the seller accept a contingent contract. But, when you add a contingency to the contract, be prepared not to get the house.”

Another way to avoid a double mortgage payment is to rent your original home. When trying to qualify for a loan on the new property, provide a valid lease that demonstrates you have rented your property by the time you need to make the first mortgage payment on the new property.

In getting your finances ready beforehand, Mr. Fannon suggests getting a home equity line of credit on your current property if you have equity in it. A home equity line gives homeowners more financial security in case the first property has not yet sold.

That’s because you can use the equity line for a down payment on a new home. And it also allows a homeowner to pay two mortgages at once if their primary home has not yet sold.

“You’re still paying for it, you’re still wasting money, you’re still making double payments, but that’s how you afford it,” Mr. Fannon says.

“Most banks won’t put a home equity line on a property that’s up for sale,” says Mr. Fannon. “So before people get ready to sell their current house, open a home equity line of credit before you put it on the market. It’s amazing how many people don’t know this.”

Another way to finance two mortgages in the short term is to open a bridge loan. It is a costly option because banks charge a higher interest rate on the loan — typically about two points higher than the average 30-year fixed-rate mortgage, which currently stands at about 7 percent.

Luckily, interest paid on a bridge loan is tax deductible.

Two types of bridge loans exist.

One allows you to borrow enough money to pay off your existing home and make a down payment on a new property. This type of bridge loan frees you to only pay your new monthly mortgage payment. When your original home sells, use the profit to pay back the outstanding balance and interest to the lender.

The second type of bridge loan requires that you keep your current mortgage and borrow against the equity so that you can use that money for the down payment on the new property.

This option is a bit more risky because in the short term, you are carrying three mortgages: One each on your existing home, your new home and the bridge loan.

Mr. Fannon suggests getting a bridge loan if a homeowner is within 30 days of closing on the new property and doesn’t have a home equity line of credit on his existing property.

“You don’t want to do a bridge loan until you have to. That’s more of a last-resort thing,” Mr. Fannon says.

Mr. Fannon says he saw more people getting caught paying double mortgages when the housing market started to turn in late 2005 and early 2006 when homeowners found it increasingly difficult to sell their existing homes.

He says he sees more conservative buyers today in the housing market.

“We feel very relieved, like we got away with something, because we know a lot of people who did not sell their houses and are in really bad financial situations,” Mrs. Shenk says. “But, we would never, ever put ourselves in a situation where we own two houses of primary residence again.”

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