The following is a guest post by George. George writes at Sobredinero.com, a personal finance site for Latinos in the US. Enjoy!
Let me tell you about a man named David. The first thing that attracted David to his condo when he first bought it was how close he was to his job. On top of that, it was near a trendy area packed with nightclubs, bars, and fancy restaurants. It was perfect for David when he was single with no kids. However, David started a family and his housing needs changed.
With a wife, one child, and another child on the way, waiting 10 years to build equity and then liquidate that equity in his condo was not an option for David. He was ready to trade in his two-bedroom downtown condo for a three-bedroom home in the suburbs.
Analyze the Options
David knew which house he wanted, but like most people, he could not afford to pay for two mortgages at the same time and even though he was fairly certain that his condo would sell quickly for the asking price, he did not want to risk his family’s financial security. He thought about moving to the new house and renting out his condo to cover the mortgage while he had the condo on the market. However, after speaking with the condo board president and reading the homeowner’s association paperwork, David discovered that renting out his home would require a lengthy and rigorous vetting process with the board. He did not have the time or money to do that.
David also considered borrowing against his 401k for the second mortgage, but if he were to leave his job before paying back the loan, he would be obligated to pay the outstanding balance of the loan within 60 days or be hammered with taxes and penalties. He learned fact by reading through the 401k materials he’d received at orientation three years earlier and he also learned that those terms were common for 401k plans. That was a dicey and expensive option.
After thoroughly weighing all of the possibilities, David decided to put his condo up for sale and simultaneously file for a second mortgage. This sounds risky on the surface, but David knew that the bank would only grant the second mortgage after the condo sold. This practice protects the interests of both the lender and the borrower.
Factor in the Real Cost
Once David decided on the list and file simultaneously route, he put in some research on mortgage terms. Taking on a mortgage is not just about paying back the amount of the loan itself. Smart borrowers also consider the interest rate, total annual cost, monthly payment terms, and the total payment. Additionally, ancillary costs such as bank fees, housing association requirements, taxes, and transportation need to be factored into the real cost of a new home purchase. David used a mortgage calculator to help him understand the true costs of his mortgage options.
Time It
David had everything in place and the only thing left to do was to sign the paperwork. To cancel a mortgage and acquire a new one requires the bank as well as a notary public, so David made sure to schedule the two transactions in one meeting and ensure a smooth process.
This didn’t always used to be the case. Historically, purchasing and selling a home at the same time was a long process. Say for example if David had purchased that condo recently to “flip” (buy for a low price and quickly re-sell at a higher price with inexpensive upgrades), he might not have been able to sell the condo because of restrictions that prevented a home sale if the home been had purchased within 90 days. However, the Federal Housing Administration has eliminated this restriction.
Get the Happy Ending
At the end of everything, David and his family turned out just fine. The condo sold, the mortgage terms for the new home were agreeable, and everyone settled into a more comfortable arrangement. Gone are the days of being tied to a house simply because you signed a mortgage. Granted, it’s not as easy to move when owning a piece of property as it is for renters, but it is certainly possible in today’s modern housing market, and the last thing you want to do is be unhappy with your home. Happy house hunting! Be sure to check out more advice about mortgages here, or here.
