First, something to consider. “Stuck in a starter” home is not a new concept. When researching the topic for this article, we came across some form this headline in articles dating 2011, 2015, 2017 and 2018—and that was just the first page of results. That’s because home values are almost always increasing, and rates fluctuate significantly. Also, inflation. It can be really tough to make the jump from renter to homeowner, but that doesn’t mean buying your second home is just a given.
So you want to move. Let’s see what we’re working with.
Option 1: Buying & Renting Out Your Current Home
You’re sitting pretty on a 2.5% with a home you purchased or refinanced in the late 2010s or early 2020s. Everyone is making jokes about never moving, but you’re over here getting creative. The thing is, you can actually keep your home and that great rate while still buying your next.
One quarter of 2023 homebuyers said they would be keeping their current home while buying their next.
There are a few factors to consider here, with these being two of the most important:
Am I ready to take on the responsibilities of being a landlord?”
Before taking the plunge to buy a new home and rent out your current home, you’ll want to consider the time and money that goes into being a landlord. Money-wise, you’ll be responsible for repairs, upgrades, and emergencies. Balance that with gaining equity and earning rental income, and you’ve got some things to consider. Being a landlord can be a rewarding role, especially financially, you’ll just want to do some digging on the specific investments of time and money you’ll need to make.
"Can I qualify for a new mortgage while I still have my current one?”
So glad you asked. Yes, there are a few options. First, if you already have enough income that qualifies you for two mortgages, you’re all set. The best way to figure out if you qualify is talking to a loan advisor. (Get on our schedule here.) And we’re not just saying that because we’re loan advisors. *Scout's honor.*
Side note: You can also speak with a financial advisor if you have one to walk through the financial pros and cons of renting out your current home. Of course, best case scenario is talking to both!
If you’re unable to financially carry both mortgages at once, just know you’re in the same boat as the majority of Americans, and there’s a solution. Since you’ll be renting out your current home, you will have rental income. To add that income to your mortgage application, you’ll just need to have a future tenant lined up with a lease agreement. That document will be given to your mortgage underwriter, and they can consider up to 75% of the lease agreement as income.
Option 2: Making Your Home New Again
You did it. You bought your first (or second, or third) home. And if you did so in the last few years, you likely have an interest rate that is hard to give up. If you’ve considered all options that involve moving, you might be ready to consider another option. This is the part in the reality show Love It Or List It where the homeowners realize their starter home was their dream home all along. (Awwe!) On the more practical side, making renovations can increase your home’s value and also offer that comfortability you’re looking for in a new home.
+ Projects To Tackle
The best types of projects improve your quality of life AND improve your home’s value. You’ll know the first part, and the second part is a bit more objective.
For improving your home’s value, think of a property listing—what are the pieces you always see highlighted? “New hardwood floors throughout, furnace only two years old, new roof in 2019.” These items are all some of the biggest contributors to increasing a home’s value. Keep in mind large changes, like renovating an entire space, will usually improve the value more than a few small things spread throughout the home.
A second category to consider is adding square footage to your home through an addition. Home prices are largely based on a price-per-square-foot in your area. Increasing your square footage creates more livable space, thus, increasing the price.
Before you start making “inspo” boards, you’ll want to see how much equity you have, and how much you can access. Just tell us a bit about you to get started. Speaking with your local real estate agent is also recommended. They can help you determine which projects will maximize the effect on your home value.
+ How You’ll Pay For The Projects
As finance experts, we’ve been waiting for this one. (Put us in, coach!) You can, of course, pay cash for renovations but when it comes to a $20,000 remodel, you might be looking at other options. And there are a few.
Home Equity Line of Credit
Did you know your home can actually pay for its own renovations? With a home equity line of credit, you can access the value of your home to improve it.
To calculate the equity you have available to borrow, we’ll use your home’s appraised value minus your current mortgage balance. Once the loan has closed, you can then draw from this line of credit to make your renovations.
And because it’s a line of credit, think of it like a credit card with a lower interest rate that’s tied to your home. Home values have risen significantly in most areas in the United States over the last few years and even months. That means you likely have equity to access.
Here at Lower, you can see an estimate of how much equity you have without it impacting your credit score at all. Just a few quick questions to get started.
Cash-Out Refinance
Much like a home equity line of credit, a cash-out refinance is accessing the equity you’ve built in the home. With a cash-out refinance, you’re accessing all of the cash all at once (vs. drawing it over a pre-determined amount of time).
Cash-out refinances can also allow you to access more of your equity. At Lower, our home equity line of credit allows you to take up to 80% of your equity. With a cash-out refinance, we’re able to go significantly higher than even most other lenders—up to 95% of the loan-to-value ratio. That can mean the difference of 10’s of thousands of dollars in equity you can access.
You’ll want to chat with a Lower loan advisor about the benefits of each option to make sure you’re choosing what’s best for you.
Personal Loan
A personal loan is an option to consider, especially if you don’t have quite enough equity built up in your home yet. These typically come with much higher interest rates than mortgage-based loans as they’re not secured by a piece of property. It’s a higher risk for the lender, so the rates are naturally higher. But, if you have a plan in place to pay back the loan quickly, this may be a great option for you.
There are a lot of personal loan options out there. Our friends at Credible are a great resource to check out.
Option 3: Selling Your Current Home
Selling your current home when you want to move may seem like an obvious answer, but there is one key thing to keep in mind.
Normally when you have a home to sell, you would list the sale of the home as a contingency to the home you’re buying. That means if the sale of your home falls through, you won’t be held to the contract for the one you’re buying. It’s a great protection for you, but not great for sellers, and they may be more apt to accept an offer without contingencies. Especially in a market where sellers have leverage to do so.
So, what if you could buy your new home before you sell your current one. You get to use the proceeds of the home you currently own, before you’ve even sold it. That makes your down payment much easier to secure, and removes the contingency from the new home’s contract.
This is especially impactful in high competition areas where sellers can reject offers that don’t fall in line with what they’re wanting. Removing this contingency is a great advantage against other buyers in the market.
Chat with your loan experts about the Lower “Buy Before You Sell” program.
