Home Buyers: Top Five Rules of Trading Up Part 2
Yesterday we went over the most basic of rules for trading up or moving out of a small home into a bigger one. It’s important to plan this move perfectly and sell your old home before you buy a new one just because of the general state of the real estate market as it is today. Today we’ll see the rest of the rules of trading up, equally as important as the others mentioned in part 1 of this post.
3. Consider renting the old home
While this is not the conventional practice and can seem like a pretty odd thing to choose, if you are interested in adding real estate to your investment portfolio, this can be a pretty good idea. Many homeowners achieve this when the home they plan on moving from has a relatively small balance left on the mortgage or is completely paid off. While the idea of refinancing that small balance, borrowing against the home seems counter-intuitive, if you are conservative about it, you can manage to do a pretty good job.
The way it works is this: homeowners will refinance the home they currently live in and take some money out as a down payment on another one. (Like I said, this works best if the previous home has a relatively low balance on it and if they borrow conservatively. You can choose to supplement the borrowed down payment with savings to avoid borrowing too much.) The earlier home then will become a rental that brings in money every month (albeit a small amount) in rent which covers the new mortgage, taxes, insurance and other repairs.
It works because buying a home today can be cheaper than renting. But make sure your math is impeccable when you do this and you are not averse to working weekends - at least every once in a while - on your rental property.
4. Do your Research
If you are considering renting out your old property and moving into a new one, I strongly advise you take some time to research the neighborhood you live in and the one you intend moving into in terms of the following questions: Are there a majority of rentals there or owner-occupied homes? What is the average rent? How much visibility would the rental have? What is the average rental period? Are leases more common or month-to-month tenancies? What is the vacancy factor? And finally, how long does a home stay on the market before it sells. You will want to know this and get a good idea of the rental as well as the sales market in the area in case you decide being a landlord takes up too much of your time or otherwise isn’t worth it.
Another aspect you want to be careful of when you decide to rent out your current home and buy a new one is that you understand and are comfortable with the kind of mortgage you get. This is true also when your current home is taking longer than usual to sell and you have your eye on a new one. If you run into the wrong lender, he or she might try to sell you a loan that might work in the short term, and if you are comfortable with that, you may take it. But be absolutely sure that you understand the consequences of it, so you are not stuck with a mortgage you cannot afford or otherwise ruins you financially.
5. Get pre-qualified
Getting pre-qualified early is always a good idea even if you have just begun considering buying a home. The reason for this is that even if you aren’t going to write an offer the next day, you might want to get an idea of your credit. With the recent changes in credit extensions, reduced credit lines and otherwise rising interest rates and balance transfer fees on credit cards, you want to be absolutely sure your credit score gets you a good home mortgage rate.
Even if you are absolutely sure of your credit, still getting pre-qualified helps because you’ll have an idea of your monthly mortgage payment, your interest rate and also your total fees. This goes back to the previous point of doing your research.
That about sums it up for the top five rules of trading up! Follow these and you should be just fine. There are many homes to look at and remember that it’s a buyer’s market currently. So once you have sold your current home (or otherwise rented it out and are happy with the numbers) more than half the battle is won. Trading up into a bigger home - or your dream home - can be done right in any market if you do your homework. Good luck!
