Financial Considerations When Selling Your Home
How selling a home can impact your finances.
As you may know by now, selling your home is a big financial decision. Not only will you (hopefully) make a profit, but there are costs to consider as well—now and down the line. Take a look at a few of the major issues you'll face during the sale. . .
Expenses & Profit. Figuring out what profit you'll make from selling your home involves some math. Get a clear view of the debits and credits involved during the sale transaction.
Trading Up vs. Trading Down. Find out how your next home can affect your future finances.
Seller Financing. The pros and cons of playing mortgage lender to your buyer.
Expenses and Profit When Selling Your Home
You have to spend money to make money.
As you may already have guessed, selling your home isn't just about raking money in. There's a debit side to the process, as well. Here are the major expenses you can expect while selling your abode:
- Mortgage balance. On selling your home, you'll have to pay off the balance of your mortgage loan. To estimate that amount, subtract from the current balance the additional payments you'll make before the closing date. Any home equity loans (second mortgages) will have to be repaid, as well. Also, call your lender and find out what they'll charge for prepayment penalties (if any) or processing the paperwork.
- Closing costs. As you're wrapping up the sale of your home on closing day, the buyer isn't the only one who will be hit up for money! Be prepared to shell out cash for the real estate agent commissions if you're using an agent (6% of the sale price is typical in Florida), repair work on your home as the result of inspections, any unpaid property taxes and document stamps (or taxes) on the deed based on the price of the property
- Moving. The costs here will vary widely depending on how far away you're moving, how much furniture you have and whether a new employer is paying for all or part of your move. Call several moving companies and get estimates before you choose one.
Profit formula to determine how much money you'll make from selling your home.
To figure out how much cash you'll have access to after the sale, simply subtract the expenses we just mentioned from your home's (estimated) sale price. That's the amount you can apply toward your next purchase—see Financing in the Buyer's section for more information.
"Tax-free" profit for selling your home
If you're married, you can make up to $500,000 in profit on the sale of your home and pay no federal income tax! (Singles can earn up to $250,000 with no tax penalty.) The catch is you have to own and live in the home for at least two of the past five years. But you can continue to buy and sell homes every two years as long as you live and continue to reap the tax-free profits.
Selling Your Home: Trading Up & Trading Down
Where are you going after you sell your home?
Your next home will cost you either more money or less money. Find out what factors will affect your wallet.
Trading up after selling your home.
If you're like many Americans, you may be selling your home to move into a more desirable one. To you, that might mean more space (for growing kids) or a nicer neighborhood or proximity to an ocean or lake. No matter how you're trading up, it will involve spending more money on housing. For a clearer picture of exactly how much trading up is going to cost you each month, take a look at the following expenses you can expect to pay:
- Your mortgage payment. To figure out how much your new monthly payment will be, click on our Monthly Payment Calculator.
- Utility bills. Whether your costs go up or down depend on the size of your new home (more square footage could cost more to heat) and how energy-efficient it is (newer homes tend to use less energy).
- Furnishings. If you're moving to a larger home, you'll probably have to buy more furniture and accessories to fill it.
- Insurance. Contact your homeowners insurance carrier and find out how much your premium will rise as a result of trading up.
- Taxes. Property taxes are based on the appraisal value of your home determined by the county property appraiser. It varies, so call the county tax appraiser in the area where you're moving and ask about the property tax rate. On the other hand, your income taxes will likely go down because mortgage interest and property taxes can be deducted.
- Maintenance. With bigger, higher priced homes there are more things that need attention. Multiply the sale price of your new home by 1% for an estimate of your annual maintenance costs.
- Homeowners association or condominium fees.
Trading down after selling your home.
Selling your current home to buy a less expensive one is known as trading down. It's a way to free up more money to live on. Retirees, "empty-nesters" and people who are looking to cut back on housing expenses can benefit from trading down. You can usually count the trade-up costs we mentioned earlier to go down as a result. Check ahead, though, if you're relocating to another city where homes seem to be cheaper. Other costs of living may outweigh your savings.
Financing Your Home Buyer Yourself
You, too, can be a lender.
Say you're having a really hard time selling your home. Or say interest rates are high and buyers are having a hard time securing mortgage loans. Either case (or both) might be an incentive to consider seller financing, or lending a buyer the money to purchase your home.
Why on earthwould you choose to be a lender when selling your home?
The main advantages of seller financing are:
- You can make money above and beyond the sale price via the interest you charge
- You can attract more buyers in a slow market
Playing the role of lender, you'll also have tax issues to consider. Will this be treated as a sale and taxed immediately or taxed over a period of time? Be sure to check with your accountant on the tax implications.
Seller financing is a risky endeavor.
Just the thought of lending your money to a buyer may make you nervous, and for good reason. First of all, if the buyer could secure a loan through a traditional source, he or she probably would. So before you go through with seller financing, make sure you:
- Can afford to wait for your money
- Get a large enough down payment—at least 20%—to cover selling expenses, any cash you may need and the possible decreases in property value if you wind up having to foreclose on the buyer
- Dive deep into the buyer's financial world to determine whether he or she really has the ability to pay you back—get a credit report
- Ask your real estate attorney to prepare a loan agreement that is legally binding and protects your interests—don't try to do this yourself!