Many senior homeowners entertain the thought of downsizing to a smaller home. A home that requires less ongoing maintenance and lower monthly expenses. A smaller yard to prune. Smaller rooms to dust. A single-level for sore knees. Or to move closer to the grand-kids. Or simply to have a freshly updated home with new decor. Many discuss this topic as an enjoyable dinner conversation. But, then the conversation turns dark with concerns about financing and moving logistics (not to mention the fear of cleaning out closets). I know, we did this a few years ago.
The initial challenge is how to finance the purchase of a new home. First option is to use the proceeds from the sale of your existing home. However, that means you sell, move and close escrow on your existing home before you have the funds and/or qualify for a loan. This means that you move-out of your existing home, move-in to a rental, move-out of the rental and finally move-in to your new home. Too much moving, check please…
Wait, you could sell your existing home after your offer on the new home has been accepted and that allows you 6-8 weeks to close on your existing home first. An offer that is “contingent” on the sale and close of your existing home. It is possible, however very unlikely, if the seller of the new home receives multiple offers, some of which have no contingencies and will close in three weeks. Maybe an option if you find a home that has been on the market awhile.
You could cash-out your stock portfolio. The funds could be used to purchase out-right or as a downpayment with a purchase loan. Thought is that you would return the funds after you sell the existing home. However, you will most likely generate taxable gains when you sell your stocks along with associated buy and sell fees. Can add up to an expensive loan to cover your move.
A bridge loan or a home equity line of credit (HELOC) is an option that most people don’t think is an option; it is. Lenders will extend you a loan based on the value of the equity you have in your existing home. Lenders will loan up to 80% of the equity in your home, which can be a lot depending how long you have owned a home here in Silicon Valley. The funds can be used in most any way you like: to purchase outright, down payment or even to fund a major remodel to update the new home just the way you want it.
The bridge/HELOC loan is paid-off as part of the closing on your existing home. Interest rates for these short-term loans are typically higher than a 30-year fixed mortgage, but then it is only for a few months. It can be a huge advantage over cashing-out stocks. And a lifesaver to avoid moving multiple times. Compass has partnered with Freedom Mortgage and Better.com to assist you with finding two reliable vendors. Local lenders are also available.
The Compass Bridge Loan Advance program provides additional financial assistance for bridge loans. Our partner, Notable, will extend you a loan for up to six months of payments on your bridge loan. This is a cash up-front payment to help offset your cash flow during this transition. This loan is paid-out out of escrow from the sale of your existing loan. This program is available with any bridge lender as long as you are listing your existing home with Compass. No interest. No fees. Just cash in your pocket.
Another program is the Compass Concierge. This is another interest-free loan that fronts you up to $30,000 to pay expenses to prep your existing home for market. It is a debit card that you can use to maximize the market value of your home: repairs, deferred maintenance, painting, landscaping, updating appliances, professional staging, whatever. This is an interest-free, no fees loan that is paid out of escrow on the closing of the sale of your home. No out-of-pocket expenses.
Also consider California’s Property Tax Transfer program. 55+ homeowner(s) can transfer their existing property tax base to a new home across the following ten counties: Santa Clara, San Mateo, Alameda, Tuolumne, Ventura, Los Angeles, Orange, Riverside, San Bernardino, and San Diego. This means no increase in your annual property tax payments. Click here for more info.
Putting this all together:
- Bridge loan – typically up to 80% of your existing equity. Is there enough to fund the out-right purchase of your new home? If not, then dramatically increase your down payment to qualify for a second mortgage, increase the likelihood of your offer being accepted and reduce future monthly loan payments.
- Mortgage – how large of a loan amount do you qualify for, given you have a loan on your existing home? Mortgage lenders typically limit loans to total debt payments (including property taxes) up to 43% of gross monthly income. The debt payments on your existing loan will count, so may have an impact if you are reaching the 43% limit.
- Compass Bridge Loan Advance – obtain an up-front, interest-free loan equal up to six months of bridge loan payments. This could be up to $30,000 for a $1M bridge loan at 6%. Click here for more info.
- Compass Concierge Advance – obtain an up-front, interest-free loan up to $30,000 to maximize the value of your existing home: updating, repairs, painting, landscaping, staging, etc. Click here for more info.
- Property Tax Transfer – avoid an increase in annual property tax by purchasing in one of the ten counties allowed by California. Click here for more info.
- Refinance Option – be sure your new mortgage allows you to refinance after all of the above is done and you are all moved in. You might qualify for a lower monthly payment once you are down to one loan. You might switch from a short-term adjustable loan to a longer-term fixed rate loan.
Send me an email if you would like additional information. I’m always available to help you or anyone you know that may be interested.
Take care and stay safe.