Bridge Financing: How To Own Two Houses Briefly
What if you’re unable to perfectly dovetail the sale of one house with the purchase of another? You could own no houses for a time, in which case you’ll have money in the bank and will need a temporary place to live. Or you could own two houses at once. The following suggestions should help you deal with such juggling acts:
Opt For A Variable Rate Mortgage And/or Shorter Term
Since you can pay off your variable rate mortgage at any time, there are no prepayment penalties attached to these types of mortgages.
A shorter term can make it easier to wait until your mortgage is up for renewal before you sell your property. If youre dealing with personal issues like illness or job loss, it may be easier to hang in there for a few months on a short-term mortgage than for a few years on a 5-year term, click and find driveway paver installation.
Keep in mind that both variable rate mortgages and those with shorter terms will likely have higher interest rates.
Calculating The Prepayment Penalty On A Fixed Rate Mortgage
With a closed or fixed rate mortgage:
- The interest rate doesnt change during the term
- The interest rate is typically lower than the opening rate for a variable rate mortgage and
- Youre allowed to make limited prepaymentsin most cases, up to 20% of your original mortgage balance on an annual basis.
The major drawback is that a prepayment penalty is normally charged if you break a fixed rate mortgage. It can be difficult for determine what exactly that prepayment penalty might be. As Ellen Roseman explains in a piece in the Toronto Star, it might be calculated in one of two ways.
First, if interest rates climbed since you signed on the dotted line, you will probably be charged the equivalent of three months of interest. The lender isnt too concerned about losing your interest payments, since they can sign up another borrower at the new, higher interest rate.
But, if interest rates dropped since you signed your mortgage papers, your prepayment penalty may be calculated differently and it may be much higher. But, you can always feel and be safe and secured with . Any new borrower will receive a lower interest rate than your current one and your lender will lose money. The lender will want to make up for that loss.
If the interest rates dropped, a lender will look at both:
- The total sum of three months worth of interest and
- the interest rate differential between the rate when you signed your mortgage papers and the current rate.*
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How To Sell A Home Thats Worth Less Than You Owe
You might find yourself in a situation where your mortgage is underwater. Thats when the principal amount of your mortgage is more than the value of your house. The value of your home may have decreased since you purchased it. If you try and sell it, you may not have enough to pay off your mortgage.
If you find yourself trying to sell a house thats worth less than you owe, you may want to consider the following:
Decide On The Length Of The Option Agreement
Just like a conventional property sale, a lease option has a time period for the contract to run. But the time period on an lease option tends to be longer than on a conventional sale.
For this to work for the purchaser , the period of the option agreement needs to be long enough for the property value to increase. This is to allow the property to be mortgaged at an increased price in order to repay the sellers mortgage and any balance of equity owed.
The length of the Agreed Period will be affected by the location of the property. For example, a property in London is more likely to appreciate in value quicker than one in the north of the country. Which means the contract period can be shorter in London. But on average lease option contracts tend to be between five and ten years long. But they can and are often even longer.
At the end of the option agreement, ownership of the property changes hands in the conventional way. As already explained, its at this point when the sellers mortgage is paid off in full. This allows title of the property to pass to the purchaser.
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When It’s A Bad Idea To Sell Your House Before It’s Paid Off
When selling your home, the name of the game is keeping balanced equity. If you’ve lived in your home for only a couple years ago and haven’t built up a lot of equity, it doesn’t make sense to purchase a home with a mortgage higher than what you owe on your previous mortgage. If you purchase a home for more than your current equity, you might accidentally turn your budget upside down.
A great real estate agent can keep you in line, so you don’t lose all the money you’ve already built.
Will Your New Living Arrangements Be Cheaper
If you do decide to sell a house to pay off debt, its important to think about what youll do after the sale is complete. You have to have somewhere to live, and unless youre moving back in with your parents, those living arrangements are going to cost money. You need to make sure those arrangements will be more affordable than your current home.
If your new living arrangements will be more expensive than your current ones, youre just going to wind up in more debt than you had to begin with. If theyre just as expensive, it comes down to the question of if you have to pay those debts off right now. In either case, make sure that your future will be manageable even after you get your debts paid down.
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Cut Your Expenses Drastically
If youre willing to start living very frugally, you could save hundreds or even thousands of dollars per month on your expenses.
Cut costs on groceries. Use less electricity. Drive less or trade your expensive car in for cheaper transportation.
Go through every line item in your budget and find a way to reduce or eliminate it. Then use the money you save to put toward your mortgage payoff.
Selling During Winter Months
Believe it or not, there really is a right time to sell during the year. Winter, especially around the holidays, is typically a slow time of year for home sales. People are busy with social engagements, and the cold weather across much of the country makes it more appealing just to stay home. Because fewer buyers are likely to be looking, it may take longer to sell your home, and you may not get as much money. However, you can take some consolation in knowing that while there may not be as many active buyers, there also wont be as many competing sellers, which can sometimes work to your advantage.
You may be better off waiting. Barring any mitigating circumstances that may force you to sell during the winter or holidays, consider listing when the weather begins to warm up. People are usually ready and willing to purchase a home when its warmer.
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When Are Prepayment Penalties Allowed
Under the 2014 revised law, prepayment penalties are allowed if the following conditions are met:
If the mortgages APR is not subject to increase, such as a fixed-rate loan.
If the loan is a qualified mortgage This is a type of mortgage with more stable terms, making it affordable for borrowers. Its usually a fixed-rate mortgage with a 30-year term. The loan should not have risky features such as interest-only payments or negative amortization.
If it is not a higher-priced mortgage This is a type of mortgage with an annual percentage rate thats higher than the Average Prime Offer Rate . APOR is a benchmark based on average interest rates, fees, and other mortgage terms offered to qualified borrowers with high credit ratings.
Take note, however, that the revised prepayment penalty rules do not apply to pre-2014 mortgages.
For majority of home loans after January 2014, lenders can only apply prepayment penalties during the first 3 years of a loan. The maximum penalty allowed is up to 2 percent. You pay 2 percent of your outstanding balance if you prepay the loan within the first 2 years. It goes down to 1 percent if you prepay it in the third year.
Today, not all creditors impose prepayment penalties. There are states that prohibit lenders from applying them. However, since other banks are regulated by federal law, they may still impose prepayment penalties without adhering to the amended law. Its best to check with your lender to know for sure.
How Soon Can You Sell A House You Just Bought
Right away if youd like. Many people buy homes to give them quick spruce-ups before turning them back over to the open market in as little as a few days. For people with large amounts of liquid cash or other equity, flipping a home is no big deal. Most homeowners dont sell the home they just bought because it doesnt make sense for their situation, but you can sell it whenever youd like.
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Can You Sell A House Before The Mortgage Is Paid Off
Yes, you can sell your house at any time after you’ve purchased it – even if you’re still repaying your mortgage and the mortgage isn’t paid off.
It’s pretty common for homeowners to sell before they’ve fully paid off their mortgage. However, if it’s a route you want to take there are a few extra things to consider.
Most importantly, you’ll still be responsible for paying off the amount remaining on your mortgage. This will usually come out of the proceeds of your sale, but if your home has gone down in value since you bought it, you’ll have to cover the difference with your savings.
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Curious about how much your home is worth right now? Try our free, online valuation tool. It combines data about property prices in your local area, with information you input about the condition of your home, to provide you with a quick estimate of your home’s value.
How To Sell A Home Thats Underwater
Most home sellers end up having positive equity in their homes. Nationally, less than 10% of homeowners have negative equity, which means they owe more on their home than its worth. Its also known as being underwater.
Sellers often end up underwater by taking out a second mortgage to cover other expenses or debts. But when its time to sell, they have two mortgages to pay off, and the market has declined.
Its not impossible to sell if youre underwater, but you can face significant setbacks. Here are some options:
Delay the sale: If your situation allows it, stay in the home and keep paying your mortgage until market conditions improve. Alternatively, you could rent out the home until you regain equity and let your renters cover the mortgage in the meantime.
Pay out of pocket: Its not ideal, but you could also pay the lender the difference in cash at closing. This is only feasible if you have the extra cash available and you cant sell later when the market is better.
Request a short sale: If you need to move and owe more than your home is worth, you might consider a short sale. A short sale is when the lender agrees to reduce the balance you owe on the home to help you sell. Lenders are more likely to allow a short sale if they fear youll foreclose on the home, so youll have to prove hardship to get it approved.
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Why Should You Pay Cash For A Home
It might sound crazy to save up cash to buy a home without a mortgage. However, have you ever thought about the total interest that you would pay if you took out a 30-year mortgage?
Think about this from a math perspective: If you borrowed $250,000 at 4% interest on a 30-year note, you would pay $179,673 in interest! That is $10,000 per year in interest for roughly 18 years.
I dont know about you, but I would rather backpack Europe every year for 18 years than pay a bank that much interest.
What could you think of to do with $180,000 besides pay it to your local bank? I could think of a few things:
- take awesome vacations regularly
- save up for a cabin or vacation home
- start a business or ministry
- achieve financial independence and retire early
Your list of what you would do with $180k might look different than mine, but I bet you can think of something.
Well, that is great, but I already have a mortgage. What should I do?
Dont worry I have you covered. Check out this mortgage calculator to see what your savings would be if you had a shorter term.
Then make a plan. Here are some things you can do to get extra cash to put toward paying your mortgage off faster.
Timing Your Final Mortgage Payment
As mentioned above, sometimes your mortgage lender will lump your final mortgage payment into your closing, which means you wont have to pay your normal monthly payment while your transaction is in escrow instead, it will be accounted for at the closing table.
When reviewing your estimated settlement statement, be sure you know how your mortgage payment will be handled. If you accidentally skip a payment while your home sale is pending, you may be charged a late fee, and your credit score could be negatively impacted.
Youll only be responsible for your mortgage through the day the home changes hands, so if your settlement statement says you are responsible for paying your mortgage normally during the escrow period, youll be refunded any overpayment upon closing.
What makes this complicated to calculate is that mortgage interest is paid in arrears , while your mortgage principal is paid in advance . So, depending on the time of month you close, you may be refunded for overpaid principal, but you may owe additional interest.
All in all, youll end up paying what you owe, down to the day, whether your final mortgage payment is made ahead of time or upon closing.
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You Don’t Get Enough From The Sale To Cover What You Owe
If the money from the sale of the property is not enough to repay what you owe, you will have to pay the difference. This is called a shortfall.
If you have a government loan called support for mortgage interest, this wont be part of the shortfall. The government will cancel the loan if you dont have enough money to pay it back.
Your mortgage lender will send you a bill for the shortfall on your mortgage. You might also get a bill from another lender if you have another loan secured on your home – like a remortgage. If you are unable to make an arrangement to repay it, your lender may go to court to force you to pay this amount.
In most cases, there is a time limit for your lender to take action to recover a shortfall. The question of time limits for the recovery of a mortgage shortfall can be complicated and it’s best to get advice.
If you don’t pay off the mortgage shortfall and then buy another property, the lender of your first property may take court action against you. If they get a court order against you and you don’t pay up, they could then apply for a charging order against your new property. This means that, when you sell the new property, the proceeds of the sale will be used to repay the shortfall. It is also possible that your lender could get an order for sale of your new home to repay the debt on the previous one.
For more information about bankruptcy, see Help with debt.
This Is What Happens To Your Mortgage When You Sell Your House
Partner has made a fraud in the contract of sale and being handed a cash and pen to the businessman … signing the contract corruption bribery concept.
Getty
These days, most people dont end up staying in their homes until their mortgage is fully paid off, which can lead many sellers to wonder if they can sell their home when they still owe money. The simple answer is yes, but if youre one of those sellers, keep reading. Below is an explanation of what happens to your mortgage when you sell your house.
What happens in a typical sale
Put simply, in a traditional sale, you should be able to sell your home for more than what you currently owe on your mortgage. If youve been paying down your mortgage over the years, youll have built up equity in your home, which you can cash in on when you sell.
When a home goes to closing, between the down payment and the mortgage loan, the buyer brings funds to settlement that are equal to your homes sale price. Those funds are then used to pay off the following:
If theres any money left after those debts are paid in full, the remainder is paid out to you as a profit. You can then use those funds to finance the down payment on a new home or however you see fit.
What happens in a short sale
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