You’ve built equity in your home, and you’re thinking about making a move. Maybe you’re looking for a larger house, or perhaps you’re ready to downsize to something smaller. Either way, the equity you’ve accumulated could help you purchase your next property.
But there’s one question that often comes up: How do you use that equity to buy another home when you haven’t sold your current one yet?
One possible solution is a home equity line of credit, commonly called a HELOC.
What Is a HELOC?
A home equity line of credit allows you to borrow against the equity you’ve built in your current home. Unlike a traditional mortgage, where you receive a lump sum at closing, a HELOC typically gives you access to a revolving line of credit that you can draw from as needed, up to an approved limit.
For homeowners who are planning to move, this can provide access to funds before their current property sells. Instead of waiting until closing to receive the proceeds from your sale, you may be able to use a HELOC to help finance the purchase of your next home.
Using a HELOC to Buy Before You Sell
Let’s say you’ve found the home you’d like to purchase, but your current house isn’t on the market yet. You have substantial equity, but most of your money is tied up in the property you already own.
A HELOC may allow you to access some of that equity to use toward the down payment on your next home. This can give you more flexibility when coordinating the sale of one property with the purchase of another.
For homeowners who are downsizing, there’s another possibility. If you’ve built enough equity and qualify for a sufficiently large credit line, you might be able to use those borrowed funds to purchase your next home without obtaining a traditional mortgage on the new property.
That doesn’t mean you’re purchasing the home without borrowing money. The HELOC is still a loan secured by your current property, and you’ll be responsible for repayment.
What Happens When Your Current Home Sells?
When you sell your current home, the outstanding HELOC balance generally must be paid off at closing, along with your existing mortgage and other obligations secured by the property.
Ideally, the proceeds from your sale will be enough to repay those balances and cover your selling expenses. That’s why it’s important to understand how much equity you have, how much you can borrow, and what your anticipated net proceeds will be before making a purchase.
HELOCs also have costs and requirements to consider. Interest rates are often variable, lenders have qualification standards, and you’ll need to be comfortable carrying the expenses associated with both properties until your current home sells.
Is Buying Before Selling the Right Move for You?
A HELOC isn’t the right solution for every homeowner, but it can be worth exploring if you’d prefer to purchase your next property before putting your current home on the market.
The key is having a plan that considers both transactions. Understanding your home’s value, your available equity, and the timing of your purchase and sale can help you decide whether this approach makes sense.
Next Steps
If you’re thinking about buying your next home before selling your current one, the first step is understanding what your home could sell for and how much equity you may have available. From there, you can explore your financing options and determine whether buying before selling makes sense for your situation.