Re-casting as a Tool When You Need to Buy and Sell

When we have a client who owns a home in Austin and they want to “move-up” and purchase a more expensive home, the timing of a buy and sell can sometimes be the biggest hurdle. A helpful tool - that may be unfamiliar to some - is a mortgage recast. While it may not be the right solution for everyone, if available, recasting could help you buy before you sell while still using the equity from your first home.

Let’s take a look at an example that many homeowners face and the options that are available to you!

Homeowners’ Challenge:

• I want to buy a new home. 

• I want to use the equity in my current home and  put it into the new house. 

• I only want to move once.

• Here’s my scenario: I’m selling an $800,000 home.  I only owe $300,000, giving me $500,000 in equity. I want to put that equity into my new home, which is going to cost $1,300,000.  What are my options?

Option 1: Sell first, then buy

Pros: 

Selling first and then buying is cash flow efficient. No unnecessary expenses are created by moving out early to sell an empty house. (Selling an empty house is always our recommendation. Have I said that yet? Oh well, I’m going to say that a few more times. 🙂)

While it’s possible that you may find your “80% perfect” next home while your current house is going through the closing process, it’s not highly probable. If you count on this happening, you are limiting yourself to the best house that is available to you in that short 3-4 week timeframe. You are not leaving yourself open to the best house for you this year.

Cons: 

I know…it does not accomplish the goal of moving once from our challenge above. Selling before buying means you will have to move twice. First you will move into temporary housing and then move again into your new home.

You may get sick of your temporary living situation. You may feel the need to compromise to hasten the process along and inevitably, you will forgo some of the features that were important to you in your new house. Your temporary living situation adds pressure and you will find the best house available to you in the next six months rather than finding the best house for you, period.

But I promise that in our experience, selling your house while you live in it does not typically make for happy humans. Showings at dinner time, kids’ bedtime, when your house may not look its best, not to mention people using the restroom in your house never make for an ideal situation. Throw in open houses when you’re trying to have a relaxing weekend and you see what I mean?  We always recommend selling an “empty” house. (Yep. I told you I would say it again.) We, of course, help you stage your home but more on that later...

Option 2. Using a contingent offer to buy and sell at the same time

Pros:

Once your house is under contract - or maybe even before you have your house listed - you may decide to make a contingent offer on a new home. This means that your home has to close before you will move forward with the closing on the new home.  This strategy keeps you from being committed to the purchase and if it works out, it can be great!

Cons:

However, it isn't likely to work out like that!  Once again, you are leaving yourself open to only the best house that is available to you in the 3-4 week timeframe.

Contingent offers are not preferable in any market, good or bad.  In good markets, sellers rarely accept contingent offers, opting instead for the highest price and fewest variables. (Remember what the ‘20-’21 market was like?  We didn’t see any contingent offers during that time.)

In bad markets, sellers won’t accept contingent offers because…it’s a bad market and they don’t have high confidence in you selling your home.

When making an offer on your new home, there is a certain amount of goodwill you use in the negotiations. Sometimes, a contingent offer works out. Frequently, though, it just creates unnecessary stress on our clients.  Buying a home is often one of the largest value transactions consumers have. It comes with its own set of stresses. Adding a move to that equation that has to happen on a certain week - while juggling school activities and work schedules - is often more trouble than its worth.

Option 3. Buy first, then sell using the re-casting option

If (and that’s sometimes a big IF) you can get approved for a new loan while still owning your current home, you can buy first, then sell.  Then you’ll just plan to own both homes for a very short time. You can then purchase the new home with a small down payment, 5%—10%, and move into it while you prep your previous home for sale.

When you have the equity from your previous home, you can decide how much you want to invest in the new house and follow the recasting process, which lowers your monthly payments and keeps the same maturity date on your mortgage. 

Pros: 

This accomplishes all of our goals from our above challenge: buy a new home, use your equity in your current home in the new house and only move once. It also allows you to sell an empty home.  (Have I mentioned that selling an empty house makes for happier humans?)

You’ll be able to purchase a home without a contingency. Thus using all of your goodwill to ask for better terms, such as price.  And you’ll still be able to use the equity from your first home to lower your payment on the new house.  You’re probably tired of me saying this, but it is much easier to buy a new house, move into it, and then put the old house on the market!

Recasting your mortgage offers the best of all worlds when “moving up” without the stress of multiple moves or contingent offers. By choosing to re-cast, you create a smoother transition that accomplishes all three critical goals —buying first, then selling, and finally re-casting your mortgage—you create a smoother transition that accomplishes all three critical goals, 

This approach eliminates the inconvenience of showing an occupied home, removes the pressure of finding the perfect house while in temporary housing, and avoids the complications of contingent offers that sellers often reject. Re-casting allows you to maintain the same loan term while lowering your monthly payments after applying your equity from your previous home sale. This lesser-known mortgage strategy might be the key to a happier, more successful home transition experience for Austin homeowners looking to move up in the market.  Talk to your lender about your options!  If you need a referral for a lender, give me a call.  I’d love to put you in touch with some great resources and just catch up while we’re at it!

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We are delighted to be your guides to Austin and Austin real estate!

Cheers,

Jen & the team

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