This is a conundrum many are facing right now. A lot of homeowners refinanced sometime between 2018 and 2021. If you did, you were likely able to take advantage of record low interest rates (between 4.54% and 2.65%.) This was because when the pandemic hit, the Fed massively intervened in the home loan market, buying more than one trillion dollars in mortgage-backed securities.
The government has stopped printing money to buy mortgage bonds to keep rates low and rates are back to normal. As of the writing of this blog, it is the first time since 2008 that the government has not been actively purchasing mortgage-backed securities to keep rates artificially low, resulting in rates normalizing between 5% and 7%.
Although these rates are normal, it is an abnormal feeling. Moreover, it is causing many to pause before selling their current home and buying one with a higher mortgage rate. In most situations, when people purchase another home, they sell their current one. Sadly you are unable to transfer the mortgage from one home to another. This means the mortgage on the current home is paid off as part of the sale, and a new mortgage is acquired as part of the purchase. So, is it wise to buy if your current home mortgage rate is low? What are your options?
IS IT WISE
As we have mentioned before, there should be a different focus when buying a primary residence versus purchasing an investment home. When purchasing for investment, you can have a hyper focus on things you cannot control like the market and rates. However, when you are purchasing a home to live in, the primary financial focus should be less about what the market rates are and more about the new potential home loan payment impacting your cash flow. The new mortgage payment must be affordable. The rest of your focus should be less about the finances and more about your family and your life.
If you are considering purchasing a new home there is likely a lifestyle need you are trying to fill. More square footage, bigger lot, a floor plan that meets your family needs, being in a specific neighborhood, closer to work or schools, closer to family, and more. For a primary residence, these are much more important things to consider and should be your focus.
Is it wise to buy a new home when your current home loan is at a record low rate? It depends. However, if your new home loan payment is affordable and fits well within your cash flow and this new home meets your family needs, then yes. It may be very wise!
However…There is a difference between debt and leverage. Wise leverage allows you to take advantage of low rates and build wealth faster. Consider the options available that allow you to keep your current home mortgage and take advantage of that low rate leverage.
Keeping the mortgage
Contrary to popular belief, you do not have to sell your current home to buy another one. You can keep the property and therefore keep the low mortgage rate. However, you do have to determine how you will continue paying the current mortgage and what you will do with the home. Most in this situation choose to rent out the home. With the emergence of vacation rentals, you now have options to rent it out long term or short term.
Rent prices are rising like crazy. As a result, keeping the home and renting it to a long term tenant could be a good income producer, especially when considering the increase in rental rates and the low mortgage you have on the home.
But many enjoy the VRBO or AirBNB game. So, if you want to dive into the short term rental space you can do that as well. We recommend following these 5 tips before doing that.
Obtaining funds for down payment
Now that you know you can keep the home and potentially turn it into an income producing investment, how do you get the money needed to purchase the next home? Most sell their current home, take the proceeds and use them for downpayment and other expenses on the new home acquisition. But there are other options.
One popular option is taking out a Home Equity Line of Credit to gain access to the equity you have in your current home. As we have talked about in this blog, there are lots of ways to access your current home’s equity and a HELC is a great solution. I think so highly of HELCs and the flexibility it adds to my overall financial picture, that I have one.
Another option is to source the down payment funds from other locations. It could be savings, a retirement account, or a new mortgage. Yes, a new mortgage. Too often people think you need to put 20% down when you buy a home. This is not true! Rather than taking out a HELC or money from your retirement account, you can obtain a low down payment mortgage on the new home to limit the amount of out of pocket expenses you may need.
Either way, no matter what you do, make sure you have the proper focus and that the finances are within your means.
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