Your Guide For Moving Up: How to Use Your Equity to Move From Starter Home to Forever Home

Homeownership comes with plenty of perks that benefit homeowners throughout their lives. One of the primary perks is the building of equity simply by paying a monthly mortgage payment.

Life changes quickly and homeowners can quickly outgrow their current home. In this blog, we’ll outline the ways that homeowners can utilize their existing equity to ‘move up’ into their next home.

Selling Your Current Home

The most common way that homeowners fund the purchase of their next home is through the sale of their current home. Most of the time, this requires careful planning; if your current home sells before you find your next home, you’ll need to find another place to live in the meantime. This can mean renting a temporary residence or moving in with a friend or family member.

When you elect to sell your home, it’s important to enlist a trustworthy selling agent to make sure your home is listed for the right price and is advertised to prospective homebuyers. The selling agent will also broker the transaction with the buyer’s agent to ensure that the home is sold for a fair price with all the necessary paperwork to complete the transaction.

Once your home is on the market, buyers should work with a lender to get pre-approved for their next purchase to minimize the time between the sale of their current home and the closing date of their next home. When an offer on your home is accepted and the loan closes, you can use the capital earned by selling your home towards the qualification and down payment for your next home.

Bridge the Gap Between Homes with a Bridge Loan

If you know you want to move up but don’t want to bridge the gap with temporary housing, a bridge loan is a great option to use the future sale of your current home to finance the purchase of your next home.

A bridge loan is a form of home financing that provides a funding source until you can secure permanent financing or pay off existing debt. If you use a bridge loan to purchase your next home, you can cash out equity from your current home to put toward the down payment on a new home or use your current home as collateral to take out a bigger mortgage for your next home.

Bridge loans are short-term loans with terms as short as 6 months and up to 3 years. They also come with interest rates roughly 2% higher than the prime rate available.

If you can’t come up with a down payment for the purchase of your new home until you sell your current home, have found a job that requires you to move with a short turnaround, or have a closing date for the sale of your current home that’s after the settlement of your new home, a bridge loan could be a great option for you!

The terms, conditions, and fees for a bridge loan can vary based on the transaction and/or the lender. If you’re curious about bridging the gap between homes with a bridge loan, reach out to your UMortgage Loan Originator for personalized advice based on your individual situation.

Cash in to Your Equity with a Cash Out Refinance

If you want to keep your current property but tap into the equity to buy another home, a cash-out refinance could be right for you. With a cash-out refinance, you swap your existing mortgage for a new mortgage and pocket the difference in cash. This allows you to access your equity to pay for a down payment and closing costs on your next home without listing your current home on the market.

Even better, if your current home has an interest rate that’s higher than the current quoted rates, you could end up saving on the mortgage payment for your current home as you transition it into a second home or investment property. On the flip side, using a cash-out refinance to purchase your next home leaves you with two new mortgages that you’re responsible for paying, or could increase the payment on your current home if rates are higher than they were when you closed.

Before you choose to move forward with a cash-out refinance, it’s a great idea to sit down with your UMortgage Loan Originator for personalized financial advice to determine whether this is the right option for you.

Borrow Against Your Equity With a Home Equity Loan

As we’ve mentioned before, the equity that you’ve built by paying your monthly mortgage payment can put you in good stead to purchase your next home. With a home equity loan, you can borrow a lump sum against your home’s equity at a fixed interest rate.

Your loan sum is based on the market value of your home, the amount still owed on your mortgage, and individual qualifying standards such as your credit score.

Home equity loans are fixed-rate loans with repayment periods as long as 30 years. With a home equity loan, you can use the funds for any purpose, including down payment and closing costs for the purchase of your next home. If the funds are used to buy a home, build a new home, or renovate your home, there are potential tax benefits that could allow you to deduct accrued interest.

Before you jump at the idea of a home equity loan, it’s important to consider whether it’s financially feasible for you. Using your original home as an investment property is a possibility, but it could mean that you’re on the hook for three mortgage payments.

Considering a Home Equity Line of Credit

With a home equity line of credit (also known as a HELOC), you can qualify for a line of credit that’s secured by your home that allows you to purchase your next home.

Similar to a home equity loan, a HELOC is a second mortgage that provides you with access to funds based on the value of your home. With a HELOC, you can borrow up to 85% of the equity you’ve earned in your home, though the exact amount varies based on your lender, your credit score, and your debt-to-income ratio.

Rather than fixed-sum home equity loans, HELOCs are a revolving line of credit with two stages: a draw period and a repayment period. During the draw period, you can borrow what you need, repay it, and then continue to borrow against that line of credit – similar to a credit card. During the draw period, you only have to pay interest on what’s used from your line of credit. Draw periods typically last 10 years.

After the draw period, you’ll enter your repayment period. During this period, which lasts anywhere between 10 and 20 years, you won’t be able to access the funds and will instead need to repay the principal and any accrued interest.

Just like with a home equity loan, keeping your original home and purchasing a new home with a HELOC means you’ll be responsible for paying three mortgages. Because your home is used as collateral for your HELOC, if you’re unable to pay it, your lender could foreclose your home.

At the end of the day, most people don’t live in their starter home forever. Depending on your eligibility, you could have a plethora of options available to use your equity as a means to buy your next home. If you’re interested in moving up, consult with your UMortgage Loan Originator for a free consultation and expert guidance to help you move up into your next home.