Buying a New House Before Selling the Old One

[jelloe]

Congratulations Park.  I'm glad it worked out for you guys.  And congratulations on your new home!

So I spoke to the bank today and I want to make sure I understand the finances associated with recasting.  For example, if the home is $1 mil and I put down 20% or $200K and then I sell my current home and put $300K from equity into the loan and then I recast.  Even though my payments are lower, am I still paying interest on the original $800K for 30yrs or will I be paying interest on the $500K that is left over on my loan for 30yrs?

 

[usctrojancpa]

The lender for the new home you are buying is going to qualify you based on the PITI for your existing home plus the PITI for your new home.  That was a surprise to me when we bought our current home but fortunately my income was sufficient. 

Not quite true...if you have 30%+ equity in your old home and you present a lease along with depositing the security deposit, they'll give you 75% of the rental income credit against the payments on the old home.

 

[usctrojancpa]

5. Rent-back agreement (but then we have no idea how long it would take for the new construction to be finished and that's assuming whoever buys our home wants to rent it out).

Actually the builder will give buyer a pretty good idea when the new construction will be finished and a estimated date of closing of escrow.  There might be some delays but usually within a just a few weeks.

Like others have suggested, just sell first and rent back.  This is pretty common method and a lot of buyers has done so.  Find a good realtor and write up a good rent back agreement.

+1  I've gotten several sellers a 2-3 month rent back on my listings, I even got one a 5 month rent back earlier this year.

 

[lnc]

Congratulations Park.  I'm glad it worked out for you guys.  And congratulations on your new home!

So I spoke to the bank today and I want to make sure I understand the finances associated with recasting.  For example, if the home is $1 mil and I put down 20% or $200K and then I sell my current home and put $300K from equity into the loan and then I recast.  Even though my payments are lower, am I still paying interest on the original $800K for 30yrs or will I be paying interest on the $500K that is left over on my loan for 30yrs?

Why not do a 5/1 ARM $800K first than refinance to a 30 year fixed $500k mortgage later.

5/1 ARM come with lower interest rate, pays more equity  and lower the monthly payment.  You got up to 5 years before you really need to refinance (you can always refinance early) and also free up some cash for you to do some upgrades, furnishings and landscaping. 

 

[potsticker]

Congratulations Park.  I'm glad it worked out for you guys.  And congratulations on your new home!

So I spoke to the bank today and I want to make sure I understand the finances associated with recasting.  For example, if the home is $1 mil and I put down 20% or $200K and then I sell my current home and put $300K from equity into the loan and then I recast.  Even though my payments are lower, am I still paying interest on the original $800K for 30yrs or will I be paying interest on the $500K that is left over on my loan for 30yrs?

No, my understanding is the amortization table is changed to account for your large one-time principal reduction. The interest is calculated off the remaining principal - so you're saving on interest. My parents did this with Bank of America, reducing their principal owed by over $500k, and it went very smoothly.
http://www.nytimes.com/2011/01/02/realestate/mortgages/02Mort.html

 

[usctrojancpa]

Congratulations Park.  I'm glad it worked out for you guys.  And congratulations on your new home!

So I spoke to the bank today and I want to make sure I understand the finances associated with recasting.  For example, if the home is $1 mil and I put down 20% or $200K and then I sell my current home and put $300K from equity into the loan and then I recast.  Even though my payments are lower, am I still paying interest on the original $800K for 30yrs or will I be paying interest on the $500K that is left over on my loan for 30yrs?

Why not do a 5/1 ARM $800K first than refinance to a 30 year fixed $500k mortgage later.

5/1 ARM come with lower interest rate, pays more equity  and lower the monthly payment.  You got up to 5 years before you really need to refinance (you can always refinance early) and also free up some cash for you to do some upgrades, furnishings and landscaping. 

Or Sell the rate UP and pick up 2-3% and fund an impound reserve account.  Once you refi, you'll get the refund of that impound account and have had the previous lender pay for your closing costs....all tax free.

 

[Liar Loan]

Congratulations Park.  I'm glad it worked out for you guys.  And congratulations on your new home!

So I spoke to the bank today and I want to make sure I understand the finances associated with recasting.  For example, if the home is $1 mil and I put down 20% or $200K and then I sell my current home and put $300K from equity into the loan and then I recast.  Even though my payments are lower, am I still paying interest on the original $800K for 30yrs or will I be paying interest on the $500K that is left over on my loan for 30yrs?

No, my understanding is the amortization table is changed to account for your large one-time principal reduction. The interest is calculated off the remaining principal - so you're saving on interest. My parents did this with Bank of America, reducing their principal owed by over $500k, and it went very smoothly.
http://www.nytimes.com/2011/01/02/realestate/mortgages/02Mort.html

Correct... Nobody can charge you interest on principal you've already paid.  That would be highly illegal and a violation of the mortgage contract (note).

Or Sell the rate UP and pick up 2-3% and fund an impound reserve account.  Once you refi, you'll get the refund of that impound account and have had the previous lender pay for your closing costs....all tax free.

This is great advice if jelloe goes the refi route instead.  I hope he/she reads it twice.

I did this with one of my rental properties to get the closing costs down (minus the refi).  The break even was around 8-10 years, so it was worth it to me to keep the capital freed up to invest in other things.

 

[smalllots]

6) I have 20% down, but ratios are high with the departure residence still there.[/b]

Soylent Green Is People.

I was in the same situation last year. I ended up with option 6. 20% down, to the builder I am keeping the existing home for rent, got a rental contract, first month rent and deposit check from "renter", then sold the home within 2 weeks after closing on the new build.

 

[sgip]

Careful on the 5/1 and Refi recommendations.

1) You can never count on being able to refi. Watch "The Big Short" - an educational film IMHO, not an adaptation of a book - to see what happens when you can no longer refinance into better terms.

As a side note, anyone reading who wants to rent out their departure residence: "Pacific Heights" is also an educational film worth watching. 

2) 5/1 ARM's often qualify not at the start rate, but start rate, plus X. X today is often higher than a 30 year fixed loan because of where LIBOR is.

My .02c

SGIP

 

[usctrojancpa]

Congratulations Park.  I'm glad it worked out for you guys.  And congratulations on your new home!

So I spoke to the bank today and I want to make sure I understand the finances associated with recasting.  For example, if the home is $1 mil and I put down 20% or $200K and then I sell my current home and put $300K from equity into the loan and then I recast.  Even though my payments are lower, am I still paying interest on the original $800K for 30yrs or will I be paying interest on the $500K that is left over on my loan for 30yrs?

No, my understanding is the amortization table is changed to account for your large one-time principal reduction. The interest is calculated off the remaining principal - so you're saving on interest. My parents did this with Bank of America, reducing their principal owed by over $500k, and it went very smoothly.
http://www.nytimes.com/2011/01/02/realestate/mortgages/02Mort.html

Correct... Nobody can charge you interest on principal you've already paid.  That would be highly illegal and a violation of the mortgage contract (note).

Or Sell the rate UP and pick up 2-3% and fund an impound reserve account.  Once you refi, you'll get the refund of that impound account and have had the previous lender pay for your closing costs....all tax free.

This is great advice if jelloe goes the refi route instead.  I hope he/she reads it twice.

I did this with one of my rental properties to get the closing costs down (minus the refi).  The break even was around 8-10 years, so it was worth it to me to keep the capital freed up to invest in other things.

I did that with a condo that I purchased for cash from a client as a rental so that he could buy his new place without waiting to sell him.  So then I did a 70% cash out refi where I got hit with a higher rate so I sold the rate up from 5% to 5.25% with 2.5pts (2.5%) credit towards closing costs and impound account....then I refi'ed in 6 months and sold the rate up from 4.5% to 4.75% with the same lender as rates were coming down and collected another 2.6pts credit towards closing costs and impound account and then financially after 12 months I did a traditional refi where the LTV was below 60% and got a 30-year fixed rate at 3.75% at .75pt to cover closing costs.  Easy peasy and probably pocketed about $6k on the 2 refis even taking into account the .25% higher rates that I was paying. 

 

[usctrojancpa]

Careful on the 5/1 and Refi recommendations.

1) You can never count on being able to refi. Watch "The Big Short" - an educational film IMHO, not an adaptation of a book - to see what happens when you can no longer refinance into better terms.

As a side note, anyone reading who wants to rent out their departure residence: "Pacific Heights" is also an educational film worth watching. 

2) 5/1 ARM's often qualify not at the start rate, but start rate, plus X. X today is often higher than a 30 year fixed loan because of where LIBOR is.

My .02c

SGIP

Agreed, you get the best bang for the buck in terms of Selling UP the rate by getting a 30-year fixed loan.

 

[Perspective]

jello,

Moving twice is a pain. We moved three times before buying our new construction home - sold a townhouse when the market returned in 2013, moved to a rental house for 18 months while house shopping, moved again for 6 months to an apt while our house was being built after signing the purchase contract, and finally moved into our house.

It was annoying, but by far the wisest financial move.

Whenever you own a home, timing the sale of your existing home to the purchase of your next home is always stressful and complicated. The 6 month construction timeframe just extends the complicated timeframe.

 

[RangeRover]

It is and like you said at the end it was a worth it financially. Moved several times including a temporary rental place. Thankful that there's a storage unit close by.

 

[Liar Loan]

jello,

Moving twice is a pain. We moved three times before buying our new construction home - sold a townhouse when the market returned in 2013, moved to a rental house for 18 months while house shopping, moved again for 6 months to an apt while our house was being built after signing the purchase contract, and finally moved into our house.

It was annoying, but by far the wisest financial move.

Wouldn't staying in the townhouse for 24 more months have been the wisest financial move?  I thought you moved due to wanting a different place, plus thinking the market might crash again which is why you rented instead of buying right away.

 

[Perspective]

jello,

Moving twice is a pain. We moved three times before buying our new construction home - sold a townhouse when the market returned in 2013, moved to a rental house for 18 months while house shopping, moved again for 6 months to an apt while our house was being built after signing the purchase contract, and finally moved into our house.

It was annoying, but by far the wisest financial move.

Wouldn't staying in the townhouse for 24 more months have been the wisest financial move?  I thought you moved due to wanting a different place, plus thinking the market might crash again which is why you rented instead of buying right away.

Right, in my circumstances, staying in the townhouse would've been the best financial move. In hindsight, I would have been able to sell it in late 2015, for slightly more than it fetched in late 2013. However, the townhouse wasn't ideal for a growing family at that point; and we fortunately had the means to adjust our living situation.