The idea of moving to a retirement village or an over fifty-five community holds a lot of appeal for retired people. Some are concerned about long-term care, and moving to a retirement community will guarantee they have access to skilled care when they need it. Some are just looking to simplify their lives or move to houses that have one-floor living. Whatever the reason, there arises the issue of buying one home before you sell the old one.
Start by calculating the cost of borrowed money. Let’s assume a purchase price of $250,000 for the property. This could be financed by taking out a Home Equity Line of Credit (HELOC) for $250,000. The average HELOC rate is currently 4.7%, according to Bankrate.com. Assuming it takes six months to sell your home, the HELOC would cost $5,875 in interest, which would be tax-deductible if you itemize.
The alternative would be to take the money out of your investments. First, you will need to consider the tax implications of selling these investments. The maximum capital gains rate is currently 15%. The sale of the investments cannot generate more than $39,000 in capital gains to equal the cost of the HELOC. The second part of the equation is more subjective. What would you earn on the $250,000 during the time it’s not invested? If the money is invested in bonds, are the bonds you’re selling paying more than 4.7% (the cost of the HELOC)? If the money is invested in stocks, what’s the chance of the market being higher when you’re ready to buy back into the market?
In most cases it will be better to borrow the money for a short period of time while interest rates are this low. Shop around for banks offering specials on HELOCs. For example, I recently saw a local bank advertising a special 1.9% rate for the first six months. Be sure to check for loan costs. Most banks don’t charge to open a HELOC; however, they may require the loan to be open for a minimum period of time. Find out what the penalty would be to close it early and figure that cost into your calculation.