Many times, homebuyers turn to others to get enough cash upfront for a mortgage.
What is trading up?
In real estate, trading up is a term that describes when a homeowner sells her home in order to buy a house that is bigger, in a better neighborhood, or has some other feature that makes it a step up from her current home. Homeowners typically help fund the purchase of the new home by using equity from their current home.
Trading up for a nicer house or better neighborhood is a common practice; many homeowners buy their first house anticipating that they will eventually move as their financial situation improves and their needs change. However, trading up is not without challenges. In addition to finding a new home, the homeowner looking to trade up needs to sell their current home a price high enough to help finance the new home, which is nearly always more expensive.
There are several approaches to take when trading up, although many financial experts recommend selling your existing home before attempting to buy a new one. You can buy first, or simultaneously search for a new home and put the old home on the market, but you risk being unable to sell it in time to finalize the deal for the new home.
One key consideration when trading up is whether real estate is in a buyer’s market or a seller’s market. Even in a seller’s market, it may be risky to make an offer on a new home without having a buyer for your current home.
Want to sell your home? Follow these tips to get the best price.
Trading up example
A newly married young couple in their 20s buys a small home without taking on more debt than they can manage. They have the benefits of home ownership and also enough room to start a family. However, once the second child comes along, more space is needed. They also want to move to an area with better schools, and one spouse has started a small business and needs a dedicated home office. So the couple decides to trade up to a more expensive, larger home in a more desirable neighborhood.
Do these things before searching for a new home.