In today’s housing market, a considerable number of homeowners have accumulated significant equity in their existing homes, leading many to contemplate selling in order to purchase a new property. Notably, the prevailing low-interest rates have led to a surge in pent-up demand amongst potential sellers. In fact, around 80% of homeowners currently benefit from an interest rate below 5%. This has created a unique scenario where homeowners, despite their desire to sell, are electing to retain their properties in order to maintain their favorable interest rate. Below I have outlined some options for homeowners in this situation.
Coordinated Sale and Purchase:
The first strategy is synchronizing the sale of your existing home with the acquisition of the new property. If the current house is sold and closed concurrently with or before the new house closing, the sales proceeds of the old home can be channeled towards the new purchase.
Take, for instance, a new home priced at $1 million, where the old home sells for $500,000. Implementing this strategy could result in a loan of $500,000 (the difference between the new home’s price and the old home’s selling price) with a monthly repayment based on your mortgage rate and term. If we consider a 30-year mortgage at a 7% interest rate, the monthly payment would be approximately $3,327. The total closing costs (inclusive of down payment and other expenses) could vary, but let’s estimate around 2-5% of the home price, say $30,000. So, you’d need $530,000 at closing (the mortgage amount plus closing costs). Moreover, this approach could leave a cash reserve from the equity in the old home after covering the closing costs and down payment. Notably, this strategy hinges on careful timing and an understanding of market dynamics, as the existing home sale must coincide with the new property purchase.
Buy First, Sell Second:
The second strategy proposes purchasing the new home first, followed by the sale of the existing property. In this scenario, Jeremy offers a loan product requiring a 25% down payment, using asset distribution as proof of repayment capacity. Confirmation of your intent to make a specified monthly distribution from your financial planner is necessary.
For example, if you’re buying a new home priced at $1 million, a 25% down payment would be $250,000. This means you would need a loan for the remaining $750,000. If we consider a 30-year mortgage at a 7% interest rate, the monthly payment for this loan amount would indeed be approximately $4,991.
The initial cost would primarily consist of the down payment ($250,000), plus any estimated closing costs. If your old home sells for $500,000 later on, you could use these proceeds to pay down the new loan. This could potentially reduce the loan balance significantly, depending on the timing and details of your sale.
However, if the proceeds from the sale of the old house ($500,000) are intended to be part of the down payment for the new house, you’d need a bridge loan or some form of interim financing to cover this until the old house sells. That’s where the financial planner’s letter comes into play: showing you have sufficient assets to cover this until the house sale goes through.
Bridge Loan Utilization:
Some loan officers might advocate a bridge loan, a short-term lending solution bridging the gap between the new home’s purchase and the existing property’s sale. This is not a good strategy because if the home doesn’t sell then you would be stuck with a high cost, high interest loan.
Bridge loans typically cover 80%-90% of the new home’s purchase price. Although the interest rate is higher than a conventional loan and requires payment of 2-3 points, it furnishes the immediate funds necessary for the new home’s purchase.
However, potential pitfalls arise if the original property’s sale encounters issues, resulting in the high-interest loan’s extended usage beyond the intended short-term period. Bridge loans are typically designed for brief durations of a few months. After the existing house’s sale, the bridge loan can be repaid in full, or its balance reduced as preferred. A refinance for the remaining balance can also be set up.
A bridge loan provider might offer to lend you up to 90% of the new home’s purchase price. In this case, that would equate to $900,000. However, bridge loans typically come with higher interest rates than conventional loans, and you may need to pay 2-3 points (or 2-3% of the loan amount) upfront.
Assuming an interest rate of 9%, the monthly payment on a $900,000 bridge loan would be about $6,750 on an interest-only basis. However, bridge loans are usually intended to be short-term, with the expectation that you’ll pay off the loan in full once your old home sells.