How do people buy their 2nd house? (To replace the 1st)

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
User avatar
Topic Author
vgc303
Posts: 46
Joined: Mon Sep 21, 2020 1:06 pm

How do people buy their 2nd house? (To replace the 1st)

Post by vgc303 »

I'm in a position where wife and I are thinking about buying a nicer house. We've had a huge increase in home equity due to the housing market and largely increased salaries since we bought this first house. Before reaching out to a lender, I'm trying to sort out what the best approach is on financing the transaction. Best approach in my opinion would be the one that costs the least and is the least PITA but also will allow us to have a competitive offer.

Background: Current home value: $610k, Remaining mortgage: $337k, Estimated Net Proceeds from selling our house: $220k
Current cash on hand: ~50k
Taxable Brokerage Account: $450k
MAX budget for new house: $850k, but ideally $800k or less

We would like to use net proceeds as the down payment amount on the 2nd house, i.e., roll all current home equity in to 2nd home equity. These are the potential options I see on the table:
1. Put an offer on a new house that has a contingency about us selling our house first.
Downside: Are sellers even accepting these types of offers in this market?

2. Finance the 2nd house loan with a minimal down payment of 3%, refinance the 2nd house mortgage immediately once 1st house sells to include the remainder home equity as down payment.
Downside: 2x closing costs

3. Sell off equities from the taxable brokerage to get $220k cash as down payment, repurchase equity positions as soon as 1st house sells.
Downside: Huge tax bill

4. Take out a home equity loan on 1st house to use as down payment on 2nd house, pay off as soon as 1st house sells.
Downside: Additional closing cost on home equity loan, interest payments for however long it takes to find the 2nd house

5. Sell 1st house first, move family in with parents locally, keep belongings in storage for an undetermined amount of time until we find the right 2nd house.
Downside: Huge PITA, and would have to live with parents for undetermined amount of time

People do this all the time right? What's the best method to the madness?
User avatar
tuningfork
Posts: 611
Joined: Wed Oct 30, 2013 8:30 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by tuningfork »

6. Sell 1st house, rent it from the buyer during the interim until 2nd house has closed. I have heard of people doing this but don't know how common it is, or if many buyers are willing/able to do this, or if it is ever done for more than a very brief period (days or a week or so).

Interested in this post because I will be in this situation later this year.
User avatar
Brianmcg321
Posts: 1619
Joined: Mon Jul 15, 2019 8:23 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by Brianmcg321 »

We sold our first house and then rented another for about six months while we were looking for the new one. Then we moved once we found the new one. It really sucks to have to move twice in one year. But we did have the majority of our stuff in storage so there wasn't much to pack when we moved into the new house.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
CletusCaddy
Posts: 303
Joined: Sun Sep 12, 2021 4:23 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by CletusCaddy »

7. Take a margin loan against your taxable brokerage account and use that for down payment; many brokers offer 2% interest or so. No tax bill, no closing cost, cheaper interest than HELOC.
DoubleComma
Posts: 686
Joined: Sun Aug 23, 2020 2:23 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by DoubleComma »

Option 2 - but opposed to Refi, simply make a huge principle payment once first house closes and ask the current lender to re-cast the loan. Might be a nominal fee for the recast, I would guess <$100.
catchinup
Posts: 328
Joined: Sun Dec 31, 2017 6:35 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by catchinup »

CletusCaddy wrote: Tue Jan 11, 2022 11:50 pm 7. Take a margin loan against your taxable brokerage account and use that for down payment; many brokers offer 2% interest or so. No tax bill, no closing cost, cheaper interest than HELOC.
Can that be done if the taxable account is with Vanguard?

Also, since the OP would still have a mortgage on their primary residence, wouldn't the new mortgage come at a higher rate since it would not be viewed as a primary resident? Or how does that work?
TropikThunder
Posts: 3385
Joined: Sun Apr 03, 2016 5:41 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by TropikThunder »

DoubleComma wrote: Wed Jan 12, 2022 12:00 am Option 2 - but opposed to Refi, simply make a huge principle payment once first house closes and ask the current lender to re-cast the loan. Might be a nominal fee for the recast, I would guess <$100.
That won't remove PMI though (which you'll have with <20% down payment).
jharkin
Posts: 3098
Joined: Mon Mar 28, 2016 7:14 am
Location: Boston suburbs

Re: How do people buy their 2nd house? (To replace the 1st)

Post by jharkin »

+1 to either taking the margin loan or open a HELOC. When we moved up we did the HELOC option (Third Federal, no fee 2.49%) , put the previous house on market as soon as the contract and inspections where done on new house. Old house sold in a weekend and we never even had double payments. And that was 3 years ago - In today's market I would have no qualms going this route, your house will probably sell the day you list it with multiple bids.

I would not do the 3% down... You will get outbid by buyers with stronger/cash offers and getting the PMI off will require refinancing right away which may be a pain.
Beachey
Posts: 206
Joined: Wed Sep 02, 2020 9:54 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by Beachey »

TropikThunder wrote: Wed Jan 12, 2022 1:08 am
DoubleComma wrote: Wed Jan 12, 2022 12:00 am Option 2 - but opposed to Refi, simply make a huge principle payment once first house closes and ask the current lender to re-cast the loan. Might be a nominal fee for the recast, I would guess <$100.
That won't remove PMI though (which you'll have with <20% down payment).
If you are able to bring your LTV under 80% they should remove PMI but I agree this is your best option in this market where a contingency to sell your home makes you non-competitive.
OnTrack2020
Posts: 992
Joined: Mon Mar 20, 2017 10:24 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by OnTrack2020 »

A few decades ago, when we purchased a more expensive home, we took out a bridge loan. I don't know if those are still offered today or not. I don't remember exactly how it worked, but I do remember having two mortgages until our first home sold. It didn't leave a lot of breathing room, but I remember it took about 4 months or so until our first home sold and was glad to go back to having just one mortgage versus two.
Last edited by OnTrack2020 on Wed Jan 12, 2022 7:42 am, edited 1 time in total.
wilked
Posts: 2039
Joined: Thu Mar 24, 2011 1:50 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by wilked »

What is your total salary? Can you carry both houses for a short time?

Do you have a parent who can loan you $100K for ~3-6 months? Use the $$ as down payment for the new house, re-pay once the old home sells.
alex345
Posts: 53
Joined: Sun Jan 16, 2011 11:13 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by alex345 »

I'd do margin loan on taxable up to some conservative level so that it never gets a margin call. Then a 401k loan (up to 50k). It seems like that will be enough cash. I've done the same with a 401k loan as a bridge loan.
User avatar
winterfan
Posts: 539
Joined: Mon Jan 05, 2015 11:06 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by winterfan »

I would probably do the HELOC. Our local market is very competitive. I would not sell unless I already closed on a second place. I've known of cases where the second house sale fell through, but they'd already sold the first one. They were scrambling to find a place to live.
jebmke
Posts: 14623
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: How do people buy their 2nd house? (To replace the 1st)

Post by jebmke »

We always sold house first. Always a relo situation.
When you discover that you are riding a dead horse, the best strategy is to dismount.
Slacker
Posts: 1010
Joined: Thu May 26, 2016 8:40 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by Slacker »

Sell current house with a lease back requirement for the few months you need to close on new house. I personally know of at least one family that did this locally. The selling market is so hot, they got the lease back provision, over asking and all cash (this happened last summer around August).
Yarlonkol12
Posts: 494
Joined: Thu Apr 11, 2019 4:28 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by Yarlonkol12 »

We have always bought the next home before selling current home as we didn't want to feel rushed on the buy or sell side. Also I can't imagine any seller accepting a sales contingency in the housing markets we have bought/sold, even pre-covid, I certainly never would have accepted one as a seller unless they offered a very large premium over asking price. I had basis in my taxable account that was basically flat, so I used that for downpayment of house #2.

If I had big gains on everything in taxable accounts or just didn't want to sell, I would have used a HELOC on existing home for the down payment of 2nd home
My posts are for entertainment purposes only.
VoiceOfReason
Posts: 270
Joined: Sat Jan 02, 2016 6:54 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by VoiceOfReason »

tuningfork wrote: Tue Jan 11, 2022 11:45 pm 6. Sell 1st house, rent it from the buyer during the interim until 2nd house has closed. I have heard of people doing this but don't know how common it is, or if many buyers are willing/able to do this, or if it is ever done for more than a very brief period (days or a week or so).

Interested in this post because I will be in this situation later this year.
I was in this situation last year. I did not want to move my family into any temporary housing. I went under contract on the 2nd house, and then put house #1 on the market with a lower price tag. Generated a bidding war, and everyone bidding quickly gave us a 30 day close with a 2 month lease back option we needed (At a rate of $1 per month). Got the funds from sale of house #1 and used at the closing for house #2 3 weeks later.

The other things I was prepared to do:

- brokerage account loan, I did not want to do this because of the inherent risk associated with a margin call. I would've only been taking a small % of the available line of credit, but I know I wouldn't have been able to sleep at night.
- HELOC - My house #1 value was not large enough to come close for this to be an option. Your situation is different.

If I were you, I would get a HELOC on house #1 (Which you will not pay much interest at all for because you don't take the $ from the account until you put it in escrow at closing for house #2 and you will presumably pay off within a month or two when house #1 closes. You're looking at a couple hundred dollars in interest) or consult with a local real estate agent on how common a lease back is in your local market.
Ron
Posts: 6830
Joined: Fri Feb 23, 2007 7:46 pm
Location: Allentown–Bethlehem–Easton, PA-NJ Metropolitan Statistical Area

Re: How do people buy their 2nd house? (To replace the 1st)

Post by Ron »

OnTrack2020 wrote: Wed Jan 12, 2022 7:41 am A few decades ago, when we purchased a more expensive home, we took out a bridge loan. I don't know if those are still offered today or not. I don't remember exactly how it worked, but I do remember having two mortgages until our first home sold. It didn't leave a lot of breathing room, but I remember it took about 4 months or so until our first home sold and was glad to go back to having just one mortgage versus two.
That's what we did when we moved/built our 2nd, 3rd, and current (final) home.

Bridge loans are interest only for the period of time you hold them (in our case, not more than a few months) so the payments are not excessive. However, they are above any current 30-year home loan since they are short term instruments. In our case(s), the loan interest was 3-4% more than the then current mortgage/note rate.

Worked well for us.

- Ron
mtwhmemn
Posts: 358
Joined: Tue Jul 03, 2018 12:07 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by mtwhmemn »

We did it by "borrowing" from our Roth IRA for the 20% down payment on the new house. It was risky as you have to get the money back into the Roth in less than 60 days if I remember correctly, but since we were really confident in how fast our current house would sell it was a calculated risk that worked perfectly.
eldinerocheapo
Posts: 179
Joined: Thu Sep 29, 2016 1:36 pm
Location: Margaritaville

Re: How do people buy their 2nd house? (To replace the 1st)

Post by eldinerocheapo »

In my last two home sales, I negotiated free rent for three months with the buyer, with the stipulation that we'd begin paying rent the fourth month. We never had to enforce the rent provision, as we found suitable new homes within the first three months of free rent. Having said that, it was nerve wracking to work all day, then check out homes until 9pm every night for over two months. I'm in our current house for 23 years, and have assured my wife that they will cart me out the front door in a box, with a hearse warmed up in the driveway!
"Dream, Dare, Do."
dandinsac
Posts: 248
Joined: Sat Jul 30, 2016 8:34 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by dandinsac »

We did this in early 2021 this way:

We bought house 2 for $893K with no house selling contingencies in January 2021. We had to put 20% down to get a $710,000 30-year mortgage at 3%. This was a non-conforming loan that we got through Chase Bank. Chase required that we have a minimum of $50K in savings when we closed. We came up with the $50K and down payment by a combination of savings, a loan from my 401K, cash out of iBonds, removal of Roth IRA contributions, and a “gift” from MIL. Once we knew we were buying this, I also lowered my 401K investments to the minimum to get the match.

We moved into house 2 right away and had some repairs and painting done on house 1. We put house 1 on the market in April and closed in May. Once we closed, we refinanced the mortgage through LenderFi, using some of the proceeds to get under the qualifying loan limit. This mortgage is 15 years, 2.125%. We also paid back the 401K loan, gave MIL a comparable “gift” and upped the 401K contributions to max out for 2021.

You’ll want to check the maximum amount for a conforming loan in your county and start talking to some banks or mortgage brokers.
vested1
Posts: 2736
Joined: Wed Jan 04, 2012 4:20 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by vested1 »

It depends a lot on the real estate market where you are buying and selling, and the confidence you have on how fast your house will sell.

We put our lakefront house on the market in mid October last year and it closed on November 22nd. By that time we had found and signed a contingent contract on a different and much nicer lakefront house 4 hours away that was 60k less than what we got for the other house. We went from 1.5 acres and a 1998 vintage three story 5x3 3077 sq ft house to a .2 acre lot and a 2018 vintage one story 3x3 2,600 sq ft. house. The house we sold had appreciated 51% in the two years since we purchased it for cash in 2019. We bought the new one for cash with the proceeds of the recent sale. That was a contract with a contingency that depended on the closing of the sale of our house. We put down 10k in earnest money that was refundable if the escrow on the sale of our house fell through. In this market that's hard to find, but the sellers of our new home were motivated and we took advantage of that. Both locations were highly sought after.

One of the offers we got was to stay in the house we sold rent free for 6 months, but they couldn't swing the financing. Our daughter lives nearby the new house and we stayed there for two weeks until the new house closed on December 1st last year.

My brother sold his house on the west coast after he got a mortgage on his new house on the east coast last year. It was a stretch carrying two large mortgages at the same time for him. Although you may think it's risky to sell without having a signed contract on a new house, it's riskier to have two mortgages and perhaps have one of those contracts fall through.

You have the distinct advantage, like we did, to be able to stay with relatives for the duration of your house hunt. We got lucky finding the house we ended up in so quickly. My only advice would be not to compromise on the new house if you get frustrated during the process of looking and just want to get it over with.

We used a professional mover to move our belongings into a 10x30 foot storage space in our new location. They were a small outfit and had no ability to store it for any length of time. Some moving companies do have that ability but will be more expensive. After we closed on the new house I got help from relatives moving our things out of storage to the new house which was close by. I rented a large U-Haul truck for that portion of the move and it cost next to nothing to do so. We paid for one month of storage.
barnaclebob
Posts: 4660
Joined: Thu Aug 09, 2012 10:54 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by barnaclebob »

Use your 50k to put a down payment on the new house. Take out a 2nd mortgage for your expected proceeds minus 50k. Primary mortgage for the rest. Then when you sell the first house, pay off the second mortgage.

Thats what we did except we still had a 20% down payment in cash, not sure how it would work out with less than 5%. Talk to a loan officer.
MarkerFM
Posts: 682
Joined: Fri Nov 30, 2018 4:18 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by MarkerFM »

There are many ways to skin this cat, and I believe all? of them have been mentioned. The only one that I think is a bad idea is to take a margin loan. $450K taxable is a small portfolio that won't yield much cash on a margin loan unless you want to take a lot of risk. And, given the small amount and that it's at Vanguard means the rate will probably be high. I say this as someone who has used margin lines to buy houses in the past, into seven figures. But the portfolio balance was much larger.
michaeljc70
Posts: 8166
Joined: Thu Oct 15, 2015 3:53 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by michaeljc70 »

Even in competitive markets, I've just put my current house on the market after having a contingent offer accepted on the new house. The seller knows that you will be able to sell your house quickly if the market is good (unless there are red flags like overpriced, odd property, bad location, etc.) If it is a crazy market where they get 92 offers over asking, that is a different situation and you probably need to be more creative (or wait).

Renting back your home is an option, but most buyers are in the same situation as you and need to get into the home they are buying. I had a buyer that was renting and they let me rent my place back for a couple of months while my new house was being built. There are a lot of things that can go wrong with that. For example, there is damage that was there before the sale and the new owner says it occurred while you were renting.
CletusCaddy
Posts: 303
Joined: Sun Sep 12, 2021 4:23 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by CletusCaddy »

catchinup wrote: Wed Jan 12, 2022 12:17 am
CletusCaddy wrote: Tue Jan 11, 2022 11:50 pm 7. Take a margin loan against your taxable brokerage account and use that for down payment; many brokers offer 2% interest or so. No tax bill, no closing cost, cheaper interest than HELOC.
Can that be done if the taxable account is with Vanguard?

Also, since the OP would still have a mortgage on their primary residence, wouldn't the new mortgage come at a higher rate since it would not be viewed as a primary resident? Or how does that work?
Vanguard offers margin accounts but at a high interest rate. Much better to transfer those assets to Schwab or M1 Finance for a 2% or less rate.
DoubleComma
Posts: 686
Joined: Sun Aug 23, 2020 2:23 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by DoubleComma »

TropikThunder wrote: Wed Jan 12, 2022 1:08 am
DoubleComma wrote: Wed Jan 12, 2022 12:00 am Option 2 - but opposed to Refi, simply make a huge principle payment once first house closes and ask the current lender to re-cast the loan. Might be a nominal fee for the recast, I would guess <$100.
That won't remove PMI though (which you'll have with <20% down payment).
Incorrect, that will remove PMI assuming the capital payment takes the LTV <75% based on original appraisal. Last I checked PMI wasn’t required on initial purchase of LTV <=80% or during the loan anytime you payments bring it to <=75%. After 2 years, you can have a reappraisal and if that appraisal brings the LTV to <80% PMI will be dropped as well.

Refi is only required when using appreciation within the first 24 months.
Last edited by DoubleComma on Wed Jan 12, 2022 10:38 am, edited 1 time in total.
CletusCaddy
Posts: 303
Joined: Sun Sep 12, 2021 4:23 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by CletusCaddy »

MarkerFM wrote: Wed Jan 12, 2022 9:43 am There are many ways to skin this cat, and I believe all? of them have been mentioned. The only one that I think is a bad idea is to take a margin loan. $450K taxable is a small portfolio that won't yield much cash on a margin loan unless you want to take a lot of risk. And, given the small amount and that it's at Vanguard means the rate will probably be high. I say this as someone who has used margin lines to buy houses in the past, into seven figures. But the portfolio balance was much larger.
Let’s be clear on what the “risk” with a margin loan is. It’s that your assets drop to a level below which the broker is willing to sustain your loan, and so they force-sell your stocks to payback a portion of the loan. In which case you are no worse off than if you had sold your stocks for the down payment in the first place, better off, actually, since you probably would still have some margin loan left even after the margin call.

A $450k portfolio can easily sustain $100k margin loan. And if you transfer it to another broker they will happily offer you 2% interest or less.
alfaspider
Posts: 3930
Joined: Wed Sep 09, 2015 4:44 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by alfaspider »

We simply saved another down payment and had income sufficient to be approved for both mortgages. By far the easiest strategy if you can swing it.
tim1999
Posts: 4046
Joined: Tue Dec 16, 2008 7:16 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by tim1999 »

Consider getting a price from Opendoor to sell your old house. They will let you change the closing date to pretty much whatever you want within a few months, let you stay for a period after closing with no formal lease for free (14 days?), and let you stay even longer (30 days? I forget) with a daily fee. Order of operations would be to get under contract with Opendoor at a closing date as far out as they will allow, get under contract on new house and set closing date, change Opendoor closing date to two weeks before closing on new house, close with Opendoor and get your $$ to use on the new house, stay in old house free for 2 weeks, close on new house, move into new house from old house and turn old house over to opendoor. My brother did this recently and the process with Opendoor worked flawlessly.
EagleI
Posts: 33
Joined: Sun Jan 14, 2018 3:04 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by EagleI »

I’m in this same situation too. The main problem we have run into is that almost all sales in our area are all cash, with prices 10’s of thousands over asking. Since most of our assets are in 401k/IRAs, we can’t compete with an all cash offer without a huge tax hit. We are preapproved on a mortgage for buying a new house, but sellers are just taking the cash offers, even if you bid more.

The only solution I see is to sell first, rent and take time finding the right house. The only problem with that is there is nothing decent to rent.

All of the other ideas mentioned here seem to be predicated on large taxable accounts, I would be interested in any other ideas on this situation.
quantAndHold
Posts: 7103
Joined: Thu Sep 17, 2015 10:39 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by quantAndHold »

tuningfork wrote: Tue Jan 11, 2022 11:45 pm 6. Sell 1st house, rent it from the buyer during the interim until 2nd house has closed. I have heard of people doing this but don't know how common it is, or if many buyers are willing/able to do this, or if it is ever done for more than a very brief period (days or a week or so).

Interested in this post because I will be in this situation later this year.
In more “normal” markets, people sell, then escrow runs an extra 30 days or so, in order to give the seller time to find a new place. Then everything closes at the same time. If you think you can get an accepted offer to buy a place within 30 days, that’s still the way to go. If not, and buyers are desperate enough to buy with this kind of condition, then sell and rent back until you find a place.

I’ve been on both sides of this. As a seller, we got to day 28 and still didn’t have a new house, and were considering just finding a temporary rental, when we found the place we’re in now. So it all worked out. As a buyer, we bought the house that the sellers needed to rent back for 2 months. We were happy to get it.
Yes, I’m really that pedantic.
mrb09
Posts: 395
Joined: Wed Aug 03, 2016 9:02 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by mrb09 »

CletusCaddy wrote: Wed Jan 12, 2022 10:35 am
MarkerFM wrote: Wed Jan 12, 2022 9:43 am There are many ways to skin this cat, and I believe all? of them have been mentioned. The only one that I think is a bad idea is to take a margin loan. $450K taxable is a small portfolio that won't yield much cash on a margin loan unless you want to take a lot of risk. And, given the small amount and that it's at Vanguard means the rate will probably be high. I say this as someone who has used margin lines to buy houses in the past, into seven figures. But the portfolio balance was much larger.
Let’s be clear on what the “risk” with a margin loan is. It’s that your assets drop to a level below which the broker is willing to sustain your loan, and so they force-sell your stocks to payback a portion of the loan. In which case you are no worse off than if you had sold your stocks for the down payment in the first place, better off, actually, since you probably would still have some margin loan left even after the margin call.

A $450k portfolio can easily sustain $100k margin loan. And if you transfer it to another broker they will happily offer you 2% interest or less.
I did this for our last house transfer. I did about a third of my taxable portfolio on a margin loan plus some cash on hand to do a 20% down on the new house. I remember signing some papers that stated the intent was to sell the old house and make the new one the primary residence. The old house sold within a month of listing, so by the time it was all settled I had just a few months interest payments. We downsized, so I paid the margin loan and the home loan off once everything was settled.
mptfan
Posts: 6814
Joined: Mon Mar 05, 2007 9:58 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by mptfan »

Beachey wrote: Wed Jan 12, 2022 7:39 am If you are able to bring your LTV under 80% they should remove PMI ...
I agree they should, but they are not required to.
User avatar
Topic Author
vgc303
Posts: 46
Joined: Mon Sep 21, 2020 1:06 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by vgc303 »

Appreciate all the responses. Seems to me like Option 1 is now to get a HELOC on house 1 to use as the down payment for house 2. Option 2 would be to get a margin loan on the taxable brokerage (This is at Schwab btw not Vanguard). I'll continue to research both to see which might make the most sense for us.
EagleI wrote: Wed Jan 12, 2022 10:56 am The main problem we have run into is that almost all sales in our area are all cash, with prices 10’s of thousands over asking. Since most of our assets are in 401k/IRAs, we can’t compete with an all cash offer without a huge tax hit. We are preapproved on a mortgage for buying a new house, but sellers are just taking the cash offers, even if you bid more.
I would be absolutely floored if people were dropping $800k cash on a house in our area. Median home price is like ~$625k. It's not the bay area so people aren't walking around with pockets full of stock options/ sold startup businesses / $1mm in previous home equity.
Nate7out
Posts: 280
Joined: Wed Jan 16, 2008 2:06 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by Nate7out »

vgc303 wrote: Tue Jan 11, 2022 11:30 pm I'm in a position where wife and I are thinking about buying a nicer house. We've had a huge increase in home equity due to the housing market and largely increased salaries since we bought this first house. Before reaching out to a lender, I'm trying to sort out what the best approach is on financing the transaction. Best approach in my opinion would be the one that costs the least and is the least PITA but also will allow us to have a competitive offer.

Background: Current home value: $610k, Remaining mortgage: $337k, Estimated Net Proceeds from selling our house: $220k
Current cash on hand: ~50k
Taxable Brokerage Account: $450k
MAX budget for new house: $850k, but ideally $800k or less

We would like to use net proceeds as the down payment amount on the 2nd house, i.e., roll all current home equity in to 2nd home equity. These are the potential options I see on the table:
1. Put an offer on a new house that has a contingency about us selling our house first.
Downside: Are sellers even accepting these types of offers in this market?

2. Finance the 2nd house loan with a minimal down payment of 3%, refinance the 2nd house mortgage immediately once 1st house sells to include the remainder home equity as down payment.
Downside: 2x closing costs

3. Sell off equities from the taxable brokerage to get $220k cash as down payment, repurchase equity positions as soon as 1st house sells.
Downside: Huge tax bill

4. Take out a home equity loan on 1st house to use as down payment on 2nd house, pay off as soon as 1st house sells.
Downside: Additional closing cost on home equity loan, interest payments for however long it takes to find the 2nd house

5. Sell 1st house first, move family in with parents locally, keep belongings in storage for an undetermined amount of time until we find the right 2nd house.
Downside: Huge PITA, and would have to live with parents for undetermined amount of time

People do this all the time right? What's the best method to the madness?
We just moved summer 2021. We bought first and then sold, we had cash for 20% down payment. We were worried that our house would sell immediately (it did) before we could find something, so we bought first. It took us several months of serious looking (after a year of casual looking interrupted by COVID) to find a place and get an offer accepted. We got outbid on some other houses. We are near a big city that had the least home price appreciation last year - so our market isn't the hottest, BUT, both the house we bought and the house we sold had multiple above list offers on Day 1 of being on the market. If the housing market is like last year:

1. Contingent on sale offer probably won't be accepted.
2. 3% down offer probably won't be accepted unless significantly higher than 20% down offers, of which there will be multiple.

Our best priced offer was at 3% down, but our realtor went back to the cash offer that was almost as high, and they matched the top price.

3. This will work, but is expensive.
4. This will work and is probably less expensive than #3.
5. This sounds unpleasant.

#4 probably wins, but do the math. Also, as mentioned above a margin loan < 2% could work as well.
TropikThunder
Posts: 3385
Joined: Sun Apr 03, 2016 5:41 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by TropikThunder »

DoubleComma wrote: Wed Jan 12, 2022 10:34 am
TropikThunder wrote: Wed Jan 12, 2022 1:08 am That won't remove PMI though (which you'll have with <20% down payment).
Incorrect, that will remove PMI assuming the capital payment takes the LTV <75% based on original appraisal. Last I checked PMI wasn’t required on initial purchase of LTV <=80% or during the loan anytime you payments bring it to <=75%. After 2 years, you can have a reappraisal and if that appraisal brings the LTV to <80% PMI will be dropped as well.

Refi is only required when using appreciation within the first 24 months.
You can’t remove PMI before two years based on the original property value, it has to be based on improvements (not appreciation). Emphasis added:
The LTV ratio must be:

- 75% or less, if the seasoning of the mortgage loan is between two and five years.
- 80% or less, if the seasoning of the mortgage loan is greater than five years.
If Fannie Mae’s minimum two-year seasoning requirement is waived because the property improvements made by the borrower increased the property value, the LTV ratio must be 80% or less.
https://servicing-guide.fanniemae.com/T ... 20Property

Freddie Mac’s guidelines are similar.
ee22bee
Posts: 45
Joined: Mon Jan 01, 2018 12:24 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by ee22bee »

vgc303 wrote: Wed Jan 12, 2022 11:25 am Appreciate all the responses. Seems to me like Option 1 is now to get a HELOC on house 1 to use as the down payment for house 2. Option 2 would be to get a margin loan on the taxable brokerage (This is at Schwab btw not Vanguard). I'll continue to research both to see which might make the most sense for us.
In addition to margin loan, Schwab also offers PAL, Pledged Asset Line. Difference between the two here:
https://www.schwab.com/strategic-borrowing

I have not used either, but have learned from a couple of BH threads that one can negotiate either type down to 1.xx% rate, as of a few months ago.
Onlineid3089
Posts: 316
Joined: Thu Jan 02, 2020 3:47 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by Onlineid3089 »

We're still in the first house that I bought in December 2012. When we decide to finally upgrade we'll buy, move, then get our house ready to go on the market. Of course, our house is paid off so that makes the decision a whole lot easier :beer
User avatar
El Greco
Posts: 502
Joined: Tue Aug 23, 2016 2:21 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by El Greco »

EagleI wrote: Wed Jan 12, 2022 10:56 am I’m in this same situation too. The main problem we have run into is that almost all sales in our area are all cash, with prices 10’s of thousands over asking. Since most of our assets are in 401k/IRAs, we can’t compete with an all cash offer without a huge tax hit. We are preapproved on a mortgage for buying a new house, but sellers are just taking the cash offers, even if you bid more.

The only solution I see is to sell first, rent and take time finding the right house. The only problem with that is there is nothing decent to rent.

All of the other ideas mentioned here seem to be predicated on large taxable accounts, I would be interested in any other ideas on this situation.
Ditto^^^^^ We are basically in the same spot. Complicated even more in because we are in NY our intended new home will be in FLA. :(
momvesting
Posts: 359
Joined: Tue Apr 12, 2016 9:18 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by momvesting »

We did a short term lease in an apartment. It was supposed to be three months but ended up being almost seven. Fortunately we only have one kid, so it worked for us. We rented a two bedroom apartment and 3 garages (but 2 were for cars and a minimal amount of storage). It’s not as big of a hassle as it seems, a lot of stuff doesn’t get unpacked in the apartment, we we were able to pack up the apartment in a Saturday. We looked into doing a pod instead of the third garage, but the garage was just so much more accessible, so even though it was where we stored things we weren’t going to use in the apartment, occasionally a need came up and we’d go digging through the spare garage to find what we needed.
Nutmeg
Posts: 256
Joined: Wed Jul 26, 2017 12:52 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by Nutmeg »

We are asking the same question. Our move would be to another state, and we don’t want to sell our current house before buying our next (and last) house.

Facts: MFJ, both over 59 1/2. IRAs: $ 2,000,000. Roths: $30k. Home value: $700,000. Debt: none. One spouse is still employed, permanently working from home, yearly income $150,000. New home cost: roughly $800-$900k (new state is slightly more expensive). Cash equivalents: $110,000 (and we save $3k per month so hope to increase this).

My idea would be to take some monthly distributions from IRAs to increase our monthly income stats in order to qualify for a mortgage on a new house. This will increase taxes for that year but allow us to increase our down payment. The next few years will be our lowest earning years before taking SS at 70 and RMDs at 72. When our current house sells, we could pay off the new mortgage and max out Roth contributions from employed spouse’s salary.

It seems that we would be much better off buying a new house before the employed spouse retires because otherwise our income (from pension and investments) would be too low for a mortgage on an $800k house, even though our net worth is high. I can’t figure out how a retired couple can buy a new house without selling their current house first. Every mortgage calculator I see online is based on income, not assets.

What do you think about my idea?
User avatar
MortgageOnBlack
Posts: 540
Joined: Sun Feb 05, 2012 8:50 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by MortgageOnBlack »

Sell your place and all of your items (except wife and dog).
Live in car until you find a new place.
neverpanic
Posts: 950
Joined: Sun May 10, 2020 12:26 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by neverpanic »

vgc303 wrote: Tue Jan 11, 2022 11:30 pmI'm in a position where wife and I are thinking about buying a nicer house. We've had a huge increase in home equity due to the housing market and largely increased salaries since we bought this first house.
Is the primary reason for moving the fact that you have more assets and income now? I'm interested in that 2% margin loan myself.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.
N.Y.Cab
Posts: 170
Joined: Wed Feb 07, 2018 8:46 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by N.Y.Cab »

Several years ago we did something like #3 but our cap gain wasn’t nearly as big and probably spread the equity sales over December and January. My wife enjoyed being a landlord so much that it took several more years to sell the 1st house and reinvest in equity again.
rage_phish
Posts: 478
Joined: Thu Jan 31, 2019 4:27 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by rage_phish »

We bought and sold at the same time. We owned two houses for about two weeks. I was comfortable we’d sell fast in this environment

I remember my parents doing the same thing in theb90’s and being stuck with two houses for multiple months
lstone19
Posts: 1388
Joined: Fri Nov 03, 2017 3:33 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by lstone19 »

mtwhmemn wrote: Wed Jan 12, 2022 8:42 am We did it by "borrowing" from our Roth IRA for the 20% down payment on the new house. It was risky as you have to get the money back into the Roth in less than 60 days if I remember correctly, but since we were really confident in how fast our current house would sell it was a calculated risk that worked perfectly.
We plan to do that for the home we currently have under contract except we have little expectation of getting the money back in the Roth (we're over 59.5 / Roths open over five years so no taxes or penalties involved). Once the old home sells, proceeds will go the taxable where they'll all be in the bond/cash part of our AA until used. Since our expectation is we'll be making distributions regularly, all we're out is the taxes on the interest on the money now sitting in taxable.
VoiceOfReason
Posts: 270
Joined: Sat Jan 02, 2016 6:54 pm

Re: How do people buy their 2nd house? (To replace the 1st)

Post by VoiceOfReason »

vgc303 wrote: Tue Jan 11, 2022 11:30 pm

3. Sell off equities from the taxable brokerage to get $220k cash as down payment, repurchase equity positions as soon as 1st house sells.
Downside: Huge tax bill


I know people don't like the capital gains taxes associated with this option, but if you dig into this, what is the cost basis and the actual gain? Even if the realized gain is 50%, you are looking at about $15-20k on a $110k gain (depending on the extra 3% on capital gains and your income). You are going to pay that capital gain at some point in your life, and it might be more in the future.

If you start doing the math on the costs of the other options, (renting a place, moving twice, having to make a stronger $ offer to get a house with a hubbard contingency etc) that number will be even smaller.

If you look at it from that perspective, it is actually a small price to pay for full control of both transactions. Sell the equities, buy house #2 that you love on your terms, go under contract and immediately list house #1. Then buy back into the market with proceeds from house #1, and if you're lucky, the market dipped a little in the interim.
User avatar
lthenderson
Posts: 6452
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: How do people buy their 2nd house? (To replace the 1st)

Post by lthenderson »

We’ve done option six every time. We save up 20% down payment and purchase second home. We fix up second house and move at a leisurely pace. We fix up old house to maximize return with increased resale value. We sell original house, replenish cash on hand and invest the rest of the equity into retirement accounts.
CletusCaddy
Posts: 303
Joined: Sun Sep 12, 2021 4:23 am

Re: How do people buy their 2nd house? (To replace the 1st)

Post by CletusCaddy »

VoiceOfReason wrote: Fri Jan 14, 2022 9:23 am
vgc303 wrote: Tue Jan 11, 2022 11:30 pm

3. Sell off equities from the taxable brokerage to get $220k cash as down payment, repurchase equity positions as soon as 1st house sells.
Downside: Huge tax bill


I know people don't like the capital gains taxes associated with this option, but if you dig into this, what is the cost basis and the actual gain? Even if the realized gain is 50%, you are looking at about $15-20k on a $110k gain (depending on the extra 3% on capital gains and your income). You are going to pay that capital gain at some point in your life, and it might be more in the future.

If you start doing the math on the costs of the other options, (renting a place, moving twice, having to make a stronger $ offer to get a house with a hubbard contingency etc) that number will be even smaller.

If you look at it from that perspective, it is actually a small price to pay for full control of both transactions. Sell the equities, buy house #2 that you love on your terms, go under contract and immediately list house #1. Then buy back into the market with proceeds from house #1, and if you're lucky, the market dipped a little in the interim.
I would rather pay $1k in margin interest and stay invested in the market rather than pay $15-20k in taxes that can continue to be deferred and lose market exposure for who knows how many months.
Post Reply