What You Need to Know About Trading Up

Recent posts on Sweet Digs Seattle:

Most people are a first time home buyer only once. Buying that “starter” home is often a harrowing experience and you figure that it will be easier when you’re ready to trade up because you have so much more knowledge. Well now the complexity doubles because you have to juggle buying the new home while selling the old one. The Get Rich Slowly blog has some advice on Selling Your Existing Home While Buying a New One from a Smart Money article on the topic.

If you sell your home first, she says, you’ll have the cash needed to make the transition, but you’ll be homeless until you’re able to close on the new property.

  • In some cases, you may be able to stay in your existing home by renting it back from the new owners.
  • If this isn’t an option, you’ll need to find temporary quarters: rent an apartment, stay in a hotel, move in with friends or family.

Neither option is ideal, especially since you’ll likely have to move your stuff twice. But financially, this is by far the smartest choice.

If you buy your new home first, you can end up in a cash crunch, especially in this current market. If you don’t have enough in savings, you’ll need to borrow money until you can sell your existing home. You can tap into your home equity, take out a “bridge loan”, or (as a last resort) borrow from your retirement savings.

When Kris and I bought the house we live in now, a sympathetic banker gave us a home equity loan to provide a temporary cash infusion despite the fact we intended to close the loan in only a month or two. (She wasn’t supposed to allow such a loan if she knew it wouldn’t be long-term because the bank would lose money. We’re grateful she did anyhow.)

Your best option, of course, is to plan your move, and to save up enough cash to be able to buy your new home first. This isn’t always possible. And in the current real estate market, it’s difficult to know just how much you’ll need to save. My youngest brother bought a new home before selling his old house, and has been carrying both mortgage payments for two years. The last I heard, it’s possible that he’ll lose both houses.

[Smart Money: Selling your home while buying a new one]

Most people I know get a home equity loan for the down payment on a new house then sell the old one. While saving up for the down payment is the smartest thing, you might not want to liquidate your investments to put down when you’ll be getting equity out of the house anyway when you sell. It’s also is a huge burden to sell your existing property and have to move your stuff twice – once to a rental or storage unit then to the new house. Most people get in trouble when they can’t sell their old property for as much as they had hoped when they took out the home equity loan. The bank appraisal is a best guess, everything sells for a price – and that price might be a lot lower than you had hoped.