My House Is Paid Off. How Do I Buy a New One?

A paid-off home represents a significant financial achievement, offering flexibility for future housing goals. Careful planning is essential for a smooth transition to a new property.

Assessing Your Current Home’s Financial Standing

Assessing your paid-off home’s financial reality is a first step toward a new purchase. Estimate your home’s market value through a comparative market analysis (CMA) from a real estate agent. Professionals use recent sales (“comps”), square footage, age, condition, and location for accurate valuation. Online tools offer preliminary estimates, but a professional CMA provides a more detailed assessment.

For a paid-off home, equity is its market value, as there are no outstanding mortgage liens. This equity is a powerful resource.

Even with a paid-off home, ongoing costs persist, especially if owning two homes temporarily. These include property taxes (0.4-2% of value annually), homeowner’s insurance (averaging $2,869/year), utilities, maintenance, and potential HOA fees (around $125/month). Factor these into your financial planning. Aligning your current home’s value with your new home goals is also important.

Leveraging Your Existing Home Equity

Your home equity offers strategic options to purchase a new home. Selling your current home first provides cash for a down payment on the new property and avoids managing two mortgage payments. This eliminates temporary financing but may necessitate temporary housing, creating pressure to find a new residence quickly.

Alternatively, access your home’s equity while still owning it. A Home Equity Line of Credit (HELOC) allows borrowing against equity, functioning like a revolving credit line during a 5-10 year draw period where only interest is paid. This provides funds for a down payment. A cash-out refinance replaces your existing mortgage with a larger one, providing a lump sum by converting equity into loan proceeds. This involves a new primary mortgage on your current home.

A bridge loan offers short-term financing to cover the gap between purchasing a new home and selling your existing one. This loan uses your current home as collateral and is repaid within 6-12 months once your property sells. Bridge loans often carry higher interest rates (10-12%) due to their short-term nature and higher risk. Understand repayment and ensure your home sells timely.

Financing Your New Home

Securing a mortgage involves understanding loan types and the pre-approval process. Conventional mortgages are available through private lenders, requiring a credit score of at least 620 and a debt-to-income (DTI) ratio below 43-50%. For higher-priced properties, a jumbo loan may be necessary, exceeding conforming limits and often requiring larger down payments and stricter approval.

Funds from leveraging your old home’s equity form your new home’s down payment. A larger down payment can reduce monthly mortgage payments and may eliminate private mortgage insurance (PMI). Mortgage pre-approval before searching for properties is important. Lenders review credit score, income, and debt-to-income ratio to determine the maximum loan amount, providing a clear budget and enhancing credibility with sellers.

Beyond the down payment, closing costs are associated with securing a new mortgage and purchasing a home. These include lender fees, appraisal fees, title insurance, and recording fees, typically 2-5% of the purchase price (e.g., $6,000-$15,000 on a $300,000 home). Prepare for these expenses for a smoother financial transaction.

Coordinating Your Sale and New Purchase

Coordinating your paid-off home’s sale and new purchase requires careful planning. Engaging a real estate agent is important; they provide market insights and manage concurrent transactions. Real estate commissions, typically paid by the seller, range from 4-6% of the sale price, divided between listing and buyer’s agents (e.g., $16,000-$24,000 on a $400,000 home).

Timing strategies are crucial. Selling your current home first and renting temporarily provides financial certainty, avoiding two mortgages. Alternatively, purchasing a new home with a contingency that your current home sells first offers peace of mind, though sellers may be less inclined to accept this in competitive markets. A simultaneous closing requires precise timing, with both sales on the same day.

Contingencies, like a “sale of home” contingency on your new purchase offer, protect you by making the new home acquisition dependent on your current home’s sale. A rent-back agreement allows the seller to remain in the home for a specified period (typically up to 60 days) after closing, becoming a tenant to the new buyer. This provides time for logistics. The closing process involves signing documents and transferring funds, requiring organization and communication.