On Tuesday, I discussed mortgage recasting. I explained that it is a reevaluation of your current mortgage which can be used to lower monthly mortgage payments based upon any large principal reductions made to the mortgage. In the post, I mentioned that many of my clients have used this strategy to buy a new house before selling an existing one. Today, I would like to delve into that topic a little further.

Now, in order to purchase a new house before selling your current house you would need to qualify for both mortgages. This means your income needs to fit the guidelines with both mortgages, and any cash reserve requirements need to be held for both mortgages. If you are unsure if you will qualify that way, please ask a qualified mortgage consultant, who will run the numbers.

But assuming you do qualify, you can buy the new house with a smaller down payment, knowing that you will use the equity in your current house to buy down the principal on the new mortgage. Once this has happened, you can recast the mortgage to create the mortgage payment you are looking for. This will allow you to buy the house you want when you find it, without the fear of losing it because your house has not yet sold.

Last month, I had a client in Livonia with a substantial amount of equity in his home. He had had it on the market for several weeks when the house of his dreams came for sale in Northville.  To get a mortgage payment he was comfortable with, he planned to use the equity in his current home as a large down payment on the new home. But since there was no real traction on his home in Livonia yet, he was afraid the house in Northville would be purchased before he could make an offer. He had considered dramatically lowering his asking price on his home in Livonia in order to attract a buyer.

But after a conversation with me, he decided to recast his first mortgage, as he had made several large principal payments over the years, to bring down his mortgage payment on that house. This then allowed him to qualify for a mortgage on the home in Northville before selling the old home. Then, once he does sell the house in Livonia, he will make a large principal reduction to his new mortgage and have it recast. So by using the tools available to us, we were able to get him into his dream home, save him thousands of dollars in equity on his existing home, and do it all at virtually no cost (recasting usually carries a nominal $250 fee).

If you have any questions about how this strategy works and how it might benefit you if you are trying to sell a house and buy another one, please contact me. And if you have anything to add about buying a house while you still have a mortgage on another home, please leave a comment.