What do you do when you want to sell a home in a buyers market? You can put the home up for sale, drop the asking price dramatically and pray for the best outcome. That could work, eventually. However, if you are looking to trade up, why not do just that? But what exactly does that mean? Images come to mind of the home seller taking your home and you taking possession of theirs and your current mortgage company placing a rubber stamp on the transaction. That however, is not exactly how it works.
If you have driven through a new home community with a lot of houses for sale, you have probably seen a sign that says “will trade”. What this essentially means is that the builder buy’s your old home if you sell them yours. It is then their responsibility to sell your old home. It is more beneficial to them to own homes all over the city, then all on one street or subdivision. For the trade to take place, you need to qualify for a new mortgage, and complete all the normal paperwork as if you are selling your current home and buying a new one. The best part of this deal is that you won’t have to wait for your house to sell to buy a new one, the seller, the builder buys your home, after qualifying for the loan, of course.
Why can’t your mortage company just move your mortgage to the new home , you ask. The answer is simple. Most mortgages today are not assumable. A new mortgage needs to be written for every house purchase as all things are not necessarily equal from one home to the next. In addition, a trade would be considered a sale and a purchase for tax purposes and the normal tax penalties and benefits would apply.
Still, there are some cases where you can transfer a mortgage from one property to another but two conditions must exist.
First, your mortgage must be portable.Portable mortgages were introduced in 2003 and allowed customers to transfer a fixed-rate loan from one home to the next. If have an adjustable rate loan, it probably isn’t portable. Portable mortgages were created for people who relocate often and the interest rate is slightly higher than in a traditional mortgage. The benefit is that you don’t have to apply for, and re-qualify for a mortgage every time you move. This can save quite a bit of money. It also protects the holder from rising mortgage rates.
Second, your new house can’t be worth more than your existing house. Your equity in the house must remain the same or increase. This does not mean that you can trade a $200,000 house for a $200,000 house. Unless you have a sizable down payment to add to your the equity of the house that you are trading for, the chances are that you will have to trade for a less expensive house, (probably closer to $175,000). This is because in a sellers market, your equity in the house will have decreased, and so you will have a smaller equity amount to apply to the new house. While the bank may more your existing mortgage, the down payment rules could very well be different.