How to Use the Equity in Your Home to Finance Your Downsizing Move

by Jess Lex

You’re feeling ready to downsize and your process will include a move. You’ve owned your home for a long time and it’s paid off. You’d like to buy something else and then sell your existing home. What is the best way to go about buying something new when all or most of your funds for the move are tied up in the equity in your current home? You have several great options you can consider that should encompass every risk-tolerance level.

Contingent Home Purchase

If you have enough equity in your home to purchase something new and are uninterested in taking on debt long-term or temporarily, your best option would be to write an offer for the next property you’re moving to that is contingent on the sale of your home. You would line up the closings so that you sell your home first and then close on the new home you’re buying with the cash in hand from your home sale.

Rentback

If you want to make sure your home is sold before you commit to buying your next option, you could consider selling your home and doing a rentback while you search for your next home. A Rentback is where you sell your home to your buyer so that you have the cash in hand from the closing and then you stay in the home for up to 60 days (as negotiated in your offer) as a “tenant” of the new buyers. That way you can shop for your next home with confidence knowing that you have the money available already to make your next purchase. Or you might be shopping once your home is under contract so that you already have your next place secured. If you save your shopping until after closing on your old home, the risk is that you don’t find what you’re looking for and run out of time on your rentback. Then you’d have to do a double move. For that reason, this isn’t necessarily my favorite strategy option, but it can work in some markets.

HELOC/HE Loan

As long as you haven’t listed your home for sale yet, you may be eligible to secure a Home Equity Line of Credit (HELOC) or Home Equity Loan (HE Loan). These loans borrow against the equity of your home. The banks will typically let you borrow up to 80-90% of your equity. If a HELOC is put in place, you can draw any amount available at any time. The HE Loan just disburses the full amount of the loan to you right away. Payments are usually interest only for a specific time period. You can use this type of financing to purchase your next home before you sell your house. It then gets paid off once you sell your house.

Bridge Loan

If you’ve already listed your home for sale and have realized that you’re going to need a loan to make your next home purchase, you can also explore Bridge Loans. A bridge loan also lends from the equity in your home so you can purchase before selling. The costs for these loans can be a bit more expensive, so if you haven’t listed your home yet, consider going the HELOC route for lower fees.

Traditional Mortgage

If you have the financial qualifications to be able to purchase a new home without selling your old one, you could also just consider taking out a traditional mortgage to bridge the gap between purchasing your new home and selling your former home. This loan does not borrow from the equity of your house and would not necessarily need to get paid off right away after selling your old home, although you can pay it off right away.

As always, strategize with your favorite realtor and/or financial advisor to make sure you’re picking the financing option that gives you the most financial security. You also want to make sure you have the right strategy for timing your move in a way that makes you feel financially comfortable.