Buying a New House Before Selling Your Old House

So you've done what so many people do -- you've found the house of your dreams before you've sold your existing house (or even thought of selling if you're like me and my wife).

How do you make it happen and keep from causing yourself a divorce or nervous breakdown?

There are quite a few questions that arise and need to be addressed when you consider making a move like this:

• Will you qualify -- typically, your new mortgage and your existing mortgage(s) will count in your debt-to-income ratios
• What about your current equity -- how will you move that from your existing home into your new home?
• Double payments -- when do those kick in and are you willing and able to take that risk?

The way that I usually suggest that people handle the new loan is to do something like an 80/15/5 on the new house -- 80% first mortgage, 15% equity line and a 5% down payment from their own funds or from their current equity line. This allows you to payoff the equity line if you choose to once your house sells and get into the new home without fussing about the equity that remains in your existing home. However, you still face the possibility of double payments after a month or so.

Let's consider a "Plan B"

This is a twist that takes an open-mind and some creativity -- some banks out there offer something called a single-pay note (also referred to as a 90 day or 180 day note). You could apply for such a loan, use it to payoff what you owe on your existing home and then get a new loan for the new house.

The beauty of the single-pay note is that you do not have to make monthly payments on it, thus taking out the worry of "double payments." The interest accrues on the note, but it is not required to be paid until the 90 or 180 days has passed. If you reach that point and your house has not sold, you are required to pay the original principal balance plus the accrued interest OR slip your banker a 20 spot and ask them to extend the note for you ;-)

Creativity can go a long way when you want to buy before you sell!!!

Find Comparable Rent Amounts - Rentometer

If you are thinking of buying a rental property or, if you are an agent helping someone else to do so, here is a new tool that may trump the MLS -- Rentometer

This is a very cool tool put out by Google. You just plug in the address, current rent, number of bedrooms and number of units in the building and it puts up a gauge showing how the current rent compares and a Google map that shows the locations of other rentals in the area. It is slightly big-brotherish, but so is Google Earth and everyone thinks that is cool ;-)

Thanks to Joshua Dorkin for this info. Joshua puts out a popular blog for real estate investors called Bigger Pockets.

Prepaying Your Mortgage versus Saving

A recent report released by the Federal Reserve Board of Chicago provides us with some empirical evidence that mortgage planning is hugely important. This report states that,

...about 38% of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice.....reallocating their savings can yield a mean benefit of 11 to 17 cents per dollar......these mis-allocated savings are costing U.S. households as much as 1.5 billion dollars per year.

Some takeaways from this report for me were:

• This is something that we can control and put into place very easily
• It comes from the Government -- i.e. typically some pretty conservative financial information comes out of the Government!
• A remarkable percentage of us do not contribute to retirement as we should (about 1/3 don't take advantage of employer-sponsored retirement plans and give up free money)
• The general arguments people make for paying down their mortgage versus saving elsewhere are very unfounded

The main argument here is that there is a true cost to not saving outside of your home or, put differently, that there can be big benefits to having money invested in retirement accounts (and elsewhere) and not having your money buried in your house.

I have gone through the entire report and have some other big "ah-hahs" that I have gotten from it which I will save for a conversation if you want to contact me or you can look for them in future posts.

Annual Equity Review & Mortgage Review

We are all encouraged to meet with our financial planner once a year, get a physical once a year, go to the dentist once or twice a year, but how often do we get a checkup on our mortgage and our home equity situation? I propose that it should rank right up there with the annual physical. Heck, it's almost as important because if you mis-manage your mortgage, the stress that comes from it could be hazardous to your health! Ok, so I'm pushing it a bit, but you get the point ;-)

The "conventional wisdom" tells us to get our mortgage, preferably a fixed rate with a principal and interest payment, pay extra monthly and build up as much equity as possible. That thinking is passed on to us effectively from the Depression and still permeates the way we think. See my previous post to learn more about this topic, but here I will urge you to contact me or your Mortgage Advisor (if you have one) to review your current loan and home equity situation. Doing so can help you to meet, and hopefully exceed, your long-term financial goals.

Do you have an adjustable-rate mortgage?

I recently heard a statistic that $2 trillion worth of ARMS are going to adjust in the next 1.5 years. For perspective -- the normal mortgage loan volume in the US annually is about that much.

This means that many of us in and around Raleigh are going to be looking to refinance to avoid the very likely increase in our interest rates. Some steps to take right now:

• Pull out your promissory note from your closing and look for the date of first adjustment
• Make a note of your current rate, your index that your rate is tied to, the margin associated with your loan and your current balance
  
• Call a mortgage consultant to analyze your situation to see if you can head off a big increase in your rate
  

My take on adjustable rate mortgages (ARMS) -- a huge percentage of us have them and a huge percentage of us should have them. As a mortgage consultant, I recommend them to the majority of my Clients because they can be a great financial planning mechanism. Simply put, why pay more for a 30yr fixed rate if the average homeowner gets a new loan (either due to refinancing or selling) every 4.7 years?

Choosing the right mortgage can be a huge step toward the success of your financial plan and reaching your financial goals. Don't think of it as "just a loan" or a commodity -- think of it as a tool to help get you where you want to go.

Raleigh real estate prices

So you're shopping for a four bedroom, two and a half bath house with about 2,200 square feet in Raleigh -- how much will you need to spend? The average reported in a study by Coldwell Banker says $218,575. That lands us about in the middle of the pack for the 6 North Carolina real estate markets on the list. Wilmington and Charlotte came in a little bit higher than us.

Sound like a lot? Well feel better, the cheapest California city on the list came in at $411,500!

House payments on the rise compared to income

Believe it or not, lenders don't always want to get you in to the most house possible. If we let you get in over your head, we end up owning the house (after foreclosure) and mortgage companies aren't in the business of owning homes.

Our rule of thumb is to not allow your house payment to be more than 30% of your gross monthly income. Most people think we're crazy and wouldn't even let it be that high, but others will often push the envelope. This article by CNNMoney talks about the fact that house payments have grown recently in comparison to rises in income.

Sometimes an even more important number is what we call your "back ratio" -- this is your total monthly debt (new house payment + car + credit cards, etc) divided by your gross monthly income. The rule of thumb here is usually 41-45%, but there are programs that let it go up to 50% or so. In my eyes, that's when we all can get into trouble and we start to sacrifice our long-term financial goals.