How to leverage your current equity to buy another home

Jason Kauffman | December 21, 2022

Most homeowners eventually come across the situation where they would like to purchase a new home, but they don’t want to sell their current home first. Purchasing a new home before selling your current home allows you to avoid a double move – especially if you are in a tough market that may require 4-5 months to find the right home. Some people want to keep their current home as a rental and purchase a new primary residence.

The first thing to discuss with your mortgage professional is whether or not you will qualify to purchase a new home without selling your current home. Some home buyers will need to sell their current home first in order to qualify for the new home they are purchasing. This is usually because their debt-to-income ratio is too high to qualify for the new home loan while counting all of the existing housing payments.

If you qualify with both payments, then there are a couple ways to approach accessing the equity in your current home.

HELOC (Home Equity Line of Credit)

A Home Equity Line of Credit (HELOC) is probably the most common way that people tap into the equity in their existing home to purchase a new home. HELOCs are like a credit card that allows you to borrow against the equity in your home. Most HELOCs will limit you to accessing around 90% of the value of your home (less any first mortgage balance), although some banks will go higher depending on their guidelines.

Something important to point out is that trying to take out a HELOC after listing your home for sale can potentially disqualify you from qualifying for the HELOC. The most sensible thing as a homeowner is to take out a HELOC well in advance of needing to use it. HELOCs are great tool to have in your back pocket. They usually have an annual fee like a credit card, but you only pay interest on money you have taken out. So, an empty Home Equity Line of Credit really doesn’t cost you anything aside from the annual fee.

Bridge Loan

A bridge loan is often structured similarly to a HELOC, but the purpose of a bridge loan is very specific. Bridge financing is intended to be a “bridge” that transfers most of the equity in your current home into a new home. Since the bank knows that they will be providing this loan temporarily and that it will be paid off once your existing home sells, they tend to charge some sort of origination fee (a percentage of the loan amount) to make up for the menial short term interest.

Use Savings with a Recast Feature

Another option that doesn’t require a bridge loan or HELOC is to use your savings for the down payment on your new home. Then once you have sold your existing home, you can replenish your savings account and put the rest of the equity towards the principal balance on your new mortgage while exercising the Recast Feature on your new loan.

Recasting a loan tends to cost about $250-$350 with your loan servicer. What it allows you to do is pay down a large amount of the principal balance and have the lender recast the reduced principal balance over the remaining term of the loan. Most lenders offer a recast feature with some qualifying rules that apply.

Selling your Existing Home

Sometimes selling your existing home first is the only option to purchasing a new home. For this to go off without a hitch the stars have to align and you have to be ready to purchase a new home as soon as you get your existing home under contract.

If you are able to get the person purchasing your home to do a 60-day rent back to you, that can buy you the time needed to make this structure work. You have to be prepared with a fallback plan in case you can’t find your new home by the time you have to leave your old home. Of all the options to transfer equity from your old home into your new home, this is the most straightforward.

There are many different ways to structure a new purchase without selling your current home. Its best to sit down with your mortgage professional and work through the different ways you can structure your purchase so you can determine the best way to approach it for your situation.