How do I hold on to my 2.75% fixed-rate mortgage and move up to a new home? This is a question lots of people who planned to move up or down in 2022 are asking now.
Anyone who purchased a starter home between 2010 and 2018 may be busting at the seams with children and pets that they didn’t have when they purchased.
Many homeowners bought their first home as an investment with a strategy to sell it in five or six years after their income, net worth, FICO scores and their home’s equity were higher. Some seniors have been planning for years to move down to a one-story home with less maintenance but are now hesitant because, like many folks, they might have a 3% fixed-rate mortgage.
Here are a few ideas on how to keep your low rate:
No. 1: Convert your departing residence to a rental property and keep the home as part of your retirement income plan. Inflation will be your friend. The rent on the property in 25 years should be 75% higher if the average rate of inflation is 3% and the home value will obviously be a lot higher, too.
No. 2: Sell a percentage of your departing residence to a trustworthy family member for them to live in and make the payments with you remaining on title to avoid the lender enforcing the due on sale clause. You could also sell 50% of the property to a friend or a family member for you and your partner to own and manage as a rental. This investor would simply pay you 50% of your equity over the low-rate mortgage. An equity share agreement is like a partnership and should be drafted with legal advice from a lawyer, but it is legal and could be a win-win for the buyer and the seller.
No. 3: Lease the departing residence for a year or two to see if you can handle being a landlord and, if not, sell the home immediately and well within three years of your move out and conversion to a rental. According to my CPA, to get the capital gain tax break, the seller must have lived in the home two of the past five years.
No. 4: The down payment on the new house can come from a HELOC or second mortgage on the departing residence, a 401k loan, gift funds, savings, the family member that buys into a percentage of the house. Every case is different, and it costs nothing to investigate and brainstorm all your options with a local mortgage professional and real estate broker. Mortgage rates feel high right now because they were at an unsustainable historic low during the heart of the pandemic.
My parents obtained a 6% fixed-rate mortgage in 1970 when they bought our Sunset District San Francisco family home in 1970 for $32,500. I bought my first house in 1985 for $120,000 with nothing down in Pacifica and assumed a first mortgage at 10%, a second mortgage at 15% and the seller carried a third mortgage for me at 12%.
Today’s national average rate sounds awful at 5.83% but historically it’s not bad and the bottom line is renting stinks. You will likely see another refinance opportunity in the future and even if you don’t, think long-term. My parent’s house is now owned by my brother and is worth $1.6 million, and that house in Pacifica I should have never sold is worth $900,000 and rents for $4,500 per month.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.