Home Upgrade – Down Payment Math Simplified
Unless you plan on renting out your existing home (which for many is a real consideration), typically the down payment on the next home will come from the sale of the existing home. With all that equity built up, the amount of down payment available will play a major role in how the financing of your next home may be structured.
So, in order to get a good idea of how much will be available, the following steps will help break down these numbers:
What is a conservative sale price for your existing home?
What is the remaining mortgage balance on your current home?
Any penalty to break your existing mortgage: check out our port vs. penalty article here for more info.
Selling costs for the existing home: A typical selling commission is 4% (calculate based on sale price)
Land Transfer Tax on the new home: Use our handy calculator here that opens ina new window (calculate on estimated purchase priced)
Lawyer and other legal fees for buying and selling: This is usually around $5,000 on the higher side
RESULTS IN THE GROSS AMOUNT AVAILABLE FOR YOUR PURCHASE.
In summary, the equation looks like this:
Sale price – current mortgage – potential breakage penalty – real estate sales costs – land transfer tax on the new home – legal and other closing costs = amount you will have for down payment on the next.
$700,000 sale price – $250,000 current mortgage – $7,000 breakage penalty for a new lower rate mortgage – $28,000 sales costs – $15,500 land transfer tax on the new home ($950,000 purchase price) – $5,000 lawyer/ closing costs = $394,500
So in this example, I could confidently say that after all the expenses and processes involved, I would have up to $394,500 available to put towards the next house.
- The math never works out perfectly, and sometimes surprises come up. So provision for a minimum $5,000 = $10,000 safety net no matter what.
- Especially if you purchase the next house before your existing house sells, assume a conservative, low-end value for the sale property. It’s usually easier to increase the down payment than to decrease the down payment later (thereby increasing your mortgage needed).
- If you have any debts that you’d like paid off (ie. HELOC, car loan, credit card…) subtracting this amount from the down payment available will increase your pre-approval power on the next house, but will also lower the down payment available.
- You may be well-positioned to use more down payment, however, using less down payment and investing the rest may be a wise consideration for some. This is given very low 5 year fixed mortgage rates.
If the closing date on your purchase property is BEFORE the closing date on your existing/ SALE property, then where is the down payment supposed to come from? The answer is bridge financing. Bridge financing loans you the down payment so that you can close the purchase property before the completion of your sale.
Check out our article HERE for a thorough explanation of bridge financing.
A deposit when going firm/unconditional on a home can really get up there into the $10s of thousands of dollars. Where can the deposit come from?
The deposit can come from pretty much any legitimate source including but not limited to savings, unsecured credit line, HELOC, a family loan, family gift or other loan sources.
If the deposit is from own savings, then the deposit automatically forms part of the down payment. Or you could ‘repay’ yourself the savings after your sale property closes.
If borrowing from an unsecured loan, credit line or family loan, please note that this will need to be repaid from the proceeds (‘profits’) of your sale property. For example, if you borrow $25,000 for deposit, then count on adding an additional $25,000 repayment to your down payment math as noted above. In any case, the math is a wash, because you are ‘repaying’ money that is already being put towards the down payment. You are not ‘out’ money in this case. But it is a bit a loop home and therefore, if you find yourself in this situation, it is important to note.
Connect with us at Altrua for more information and a personalized explanation.