What is House Trading and how does it work?
The concept of House Trading is actually quite simple and can always exists when there are two homeowners that agree to trade the equity in their home for the equity in another.
Whether the two homeowners are looking to relocate, or simply wanting to upgrade (or downgrade) into another home, house trading is a viable option.
In fact, the concept of house trading has some benefits over traditionally just selling a home, and then buying another one.
The house trading process is completed primarily by the escrow company.
Here is a simple example of this process:
Homeowner “A” owns a home valued at $300,000 (Property 1)
Homeowner “B” owns a home valued at $400,000 (Property 2)
Both parties agree to a trade.
Homeowner “A” obtains a purchase mortgage loan in the amount of $100,000 and closing costs.
(The mortgage lender will give Homeowner “A” a mortgage loan for the $100,000 + closing costs for the $400,000 purchase, and regard the $300,000 of equity transfer from their traded home as their down payment towards the new home.)
At closing, the escrow company transfers the rights of Property 2 from Homeowner “B” to Homeowner “A” while simultaneously transferring the rights of Property 1 and the $100,000 to Homeowner “B.”
This single sale is recorded and the process is complete!
Homeowner “B” now owns Property 1 (valued at $300,000) and $100,000. While Homeowner “A” now owns Property 2 (valued at $400,000) with their home mortgage in the amount of $100,000.
Because these (traditionally) two transactions are now being facilitated within one single transaction, both homeowners save thousands on real estate taxes, closing costs, fees, and commissions.
(Note: This process also works in reverse, or if there are previous home mortgages on either (or both) of the properties.)