The average mortgage takes over 25 years to pay off. During that time, quite a lot can happen in your life. You may well still be paying off your current home before you suddenly find that your family is about to grow, and you will need more space. There are often reasons that we need to move to other towns and cities. You may move for work, or due to family commitments.
Your mortgage should never be a burden that prevents you from getting out there and living your life. Selling a home while you have a mortgage on it is not at all uncommon. It probably happens more than you might imagine. Here’s how you can go about selling your current home while buying a new one, while you still have a mortgage in place.
What Happens to Your Mortgage When You Decide to Sell Up
One of the worries that a homeowner might have before selling a home is that they won’t have enough equity stored up in their property. The danger is that if your home is not worth as much as your mortgage it could be deemed to be “underwater” and you may be in “negative equity.”
In an ideal situation, you will have plenty of equity stored up. Hopefully, you will have more than enough to pay off the balance on your loan while still covering all of the closing costs and making a profit. Once you have closed, the money from the sale of the home should cover any money that you still owe on your property.
If you’ve only owned the home for a year before it is time to put it up for sale, you should check that you will not get penalized by the lender.
What Exactly Is Equity? Why Is It So Important To The Sale Of Your Home?
The equity of your property is the amount that you would earn from the sale of your home after you have repaid the balance of the loan and also after deducting any fees that are applicable to the sale.
Equity falls into two different types:
- Home Investment Equity – this refers to any money that you have put into the home since you bought it. This will include your deposit, all of your monthly mortgage payments as well as the cost of any home improvements that you might have made while you owned the home.
- Earned Equity – a change in the current housing market along with any modifications that you have made will affect the value of the property. If your home is now worth more than you have paid for it, the difference in values will be your earned equity.
You can only measure this figure when it comes to selling your home.
What Happens If Your Home Is Under Water
Underwater is a term that refers to the fact that it is worth a lower amount now than when you bought it. This is also referred to as being in negative equity. When your home is said to be in negative equity, you owe more on the loan than its current market value.
In this situation, you will ideally want to wait until the market improves before selling the property, or look for ways to increase its value.
If you don’t have enough guaranteed equity within the property left to repay your mortgage, but you really have to move on, this is referred to as a “short sale.” In this scenario, the mortgage lender will agree that you are allowed to sell the home for less than you owe. The lender will then accept the loss.
If you do sell your home in this way, it is highly likely that your credit score will be affected. This will then have a knock-on effect on your ability to buy a new home in the future.
Finding out How Much Is Left on Your Mortgage
Speak with your lender and find out exactly how much you will need to pay to close your mortgage.
The payoff amount will be a different figure from the remaining balance on your mortgage. This is because the payoff amount will include all of the interest that has been accrued up to the close date. This means that the payoff figure is the most accurate.
Your payoff quote will be valid for a set period. This is generally around one month.
Your payoff quote will be useful while you are in the process of selling your home. A real estate agent such as Cami Jones & Company will value and market your home. You will be able to compare your market value with the payoff quote and this will give you an idea of whether your home will have equity or whether it will be a short sale.
Should I Renovate My Home Before I Try to Sell It?
The answer to this question lies in the amount of equity that you have stored up in your property at the point of sale.
If you have enough equity right now then you might be a better idea if you were to sell your home the way that it currently is. This will save you time and money. It will also be far less effort.
Speak with your real estate agent and get a valuation on the house in its current state. From this, you can work out whether you have any equity in the property.
If it does look like you are in negative equity, then renovating your home might give you a helping hand in terms of stopping your home from selling short.
If you are able to carry out the work yourself to a high standard, then this might save you money.
However, if you carry out work that costs a considerable amount, but that does not add much value on, then this won’t be helpful. You should look at the areas that provide the greatest returns.
How to Sell Your Home and Buy at the Same Time
If you are buying and selling at the same time, the best way to do this is to sell your home first, and then buy the new one. This way, you’ll have the payout for selling your old home which you can then transfer over to make the downpayment on the new home.
Sometimes you can’t quite plan the order things will happen in, especially when you’re in a chain.
If you decide to do things the other way around, it could be a bit tricky. You won’t have the money from your current home for your deposit You’ll have three choices:
- Take out a short term bridge loan to pay off your existing mortgage. Once your home sells, you will pay the loan off with the proceeds from the sale.
- Have a second mortgage. This option only works if you can afford to do this.
- Use a home sale contingency which will be included in your offer on your new home. This clause lets you end the contract if you cannot find a buyer from your current home.
The route you select will largely depend on your credit score.
Selling your home shouldn’t be something that you spend a long time worrying over. People do it every day. With the support of your real estate agent, your lenders, and a mortgage advisor, it is possible to sell and buy your new home at the same time without too much stress.