Paying off your mortgage early, before selling, might seem like a good way to avoid mortgage payment confusion, assuming you have enough cash. However, there’s limited benefit to paying the mortgage in full before selling. Yes, it would allow you to offer seller financing to a buyer, but it also may set you up to owe more at closing. Why? Because you could be subject to a prepayment penalty, depending on the terms of your loan.
Can you have two mortgages at once?
Buying and selling at the same time can be financially and logistically challenging. If you are still holding the first mortgage when you apply for a second, you may have too high a debt-to-income ratio to qualify for your new loan. It’s also common for people to need the cash from their home sale to put toward their new down payment, so that presents an additional challenge.
If you don’t have the debt-to-income ratio or cash availability to juggle both transactions at once, you may need to sell your previous home first and wait until the transaction clears before you buy again. Depending on the state of your local market, you may be able to put an offer on a new home that is contingent on the sale of your old home.
A bridge loan is a temporary loan that allows you to borrow your down payment for your new home while waiting for the proceeds from the sale of your old home to be available. You will still need to qualify for your new loan while owning the old home, and you’ll have to be able to afford the cost of two mortgages plus bridge loan interest for a short period of time.
In an assumable mortgage, the buyer takes over the seller’s existing mortgage. It’s an arrangement that is usually available for FHA or VA loans only. It requires lender approval, and usually there is no change in terms – meaning the buyer will assume your same interest rate and loan balance. This type of arrangement benefits the seller because you can market that you’re open to an assumable mortgage in your listing description. And in some cases, that gives your buyer access to a better interest rate than what’s currently available. It can also be a boon to negotiating – a buyer may be willing to pay more for the home if they can get a better interest rate that lowers their monthly payment.
However, assumable mortgages can be hard to facilitate, as the buyer often needs to have a good amount of cash to make it happen. For example, if you are selling your home for $300,000 and your remaining loan balance is $150,000, the buyer will assume your $150,000 mortgage but will need to bring an additional $150,000 to the table to arrive at the sale price.
How to minimize selling and buying overlap
The longer you’re floating two mortgages, the more it’ll cost you. To minimize overlap time, consider marketing your home to a cash buyer. They’re usually willing and able to close quickly, although keep trade-offs in mind – you may risk selling for less than market value.
Can you make money selling a house you still owe on?
When you’re selling a house before the mortgage is paid off, how much money (if any) you’ll make depends on how much you sell for, how much you owe on your existing mortgage and how much you’ll have to pay in transaction costs. The best thing you can do is estimate the financial outcome ahead of time.