It may be tempting to purchase a new home before selling your current residence. There are many obvious risks associated with buying a home before selling another, including maintaining mortgages on two homes simultaneously. However, there are several less conspicuous details to consider when making this choice.
Worst-Case Scenarios
Murphy's Law states that anything that can go wrong, will go wrong. Although this is a pessimistic view of life, it is important to consider realistic worst-case scenarios that may arise if you choose to buy a home before selling your own. For example, if an unexpected job loss or health issue would make it impossible for you to make two house payments every month, then you should probably not buy a new home before you sell your current house. If you have an emergency fund of at least six to 12 months of expenses, it should be enough to pay for both mortgages so that you are covered if the unexpected does occur.
Unforeseen issues could arise in one or both homes that would increase your expenses. Expensive structural issues such as needing a new roof could come up during the inspection of your current home. If you are expected to fix this before you can sell your home, these expensive problems could seriously jeopardize your financial situation.
Equity in Your Current Home
The amount of equity that you have accrued in your current home is also an important consideration when making this decision. If you have built significant equity in your current home, then you may have the financial cushion that is likely to be necessary to shoulder all of the risks that are associated with carrying two mortgages. A minimal amount of equity in your current home may indicate that you are not financially secure enough to take on another mortgage. If your mortgage is currently underwater, then it will probably be difficult for you to be approved for mortgages on two separate homes in the first place.
Assessing the Real Estate Market
It is important to understand how competitive the real estate market is in the area where you are planning to buy your home as well as the area where you are planning to sell your home. The economics of supply and demand play into both buying and selling decisions. If the real estate market is not competitive in the area where you intend to buy a home, then it may make sense to wait to buy a home until you sell your current one, since there should be an adequate supply of homes in the area.
Things become more complicated in an area with a competitive buying real estate market, especially if you have found a good value on a home in the area. In this scenario, it would make sense to evaluate the market in the area in which you are currently living. If your current home has been on the market for a long period of time, it may be time to lower the price on your home to facilitate a quicker sale. Take a close look at the homes in your immediate neighborhood and the areas in close proximity, paying particular attention to home pricing and the amount of time they have been on the market, so that you can understand how long it takes for homes in your area to sell.
Costs Associated With Buying a Home
In addition to the base price of a home, there are many additional expenses to consider. These include home inspection and surveying costs, taxes and additional closing costs. These costs can be particularly cumbersome since they must be made up front. Be sure to include these when determining how much it will actually cost to buy a home before you can sell your current residence.
Costs Associated With Selling a Home
As with purchasing a home, there are many hidden costs to selling a home. You may have to pay for some of the closing costs, real estate agent commissions, transfer taxes, home warranty expenses and other moving expenses. You must pay these costs whether or not you choose to buy a new home before you sell your current home. Keep in mind that you will have to pay these in addition to the expenses that you will be paying for your new home.
Owning Your Home Outright
If you own your current home outright, then the risks associated with buying a home before you sell your current one are somewhat diminished. Financially, your decision becomes a matter of how you plan to pay for your new home while you have a large amount of money tied into your current home. You may decide to take a mortgage on your new home while you are waiting to sell your current home, and then apply the proceeds of your home sale to your mortgage.
Determine Your Risk Tolerance
The term "risk tolerance" is often used to discuss the amount of volatility an investor is willing to tolerate to achieve a financial reward. However, your risk tolerance is the key to making a decision on whether to purchase a new home before selling your own. If you have issues with taking on additional risk, then buying a new home before selling your current one is unlikely to be the right decision for you.
Making the Decision
The final decision of whether to buy a home before selling your current one is yours alone. Only you can assess your current financial position and the amount of risk you are willing to shoulder. Before you make this decision, educate yourself on the real estate market in your area. Note that physically maintaining two homes, and keeping the home that you are trying to sell in move-in condition, can be a particular challenge, especially if they are in two different parts of the country. Be sure to take any emotions that you have may have out of this decision, and understand the real financial implications involved in owning two homes simultaneously.
Source: investopedia.com
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