From Condo to Detached Home: How to Upsize Without Breaking the Bank
For many growing families, the transition from a condo or townhome to a detached home is the natural next step. As your lifestyle evolves, so do your space and privacy needs. But upsizing doesn't have to mean stretching your finances to the limit. With thoughtful planning and the right strategy, you can make the leap without breaking the bank.
Refinancing and Pulling Equity
One potential strategy involves refinancing your current condo or townhome to pull out equity and use those funds toward the down payment for a detached home and then keeping your old property as a rental. This can work well, particularly in a rising real estate market where your current home has appreciated significantly.
However, it's important to structure the mortgage correctly if you plan to convert your old home into a rental property. If you refinance and pull equity to buy a new primary residence, not all of the interest expense may be tax-deductible. It’s important to work with a team of professionals including an Accountant and a Mortgage Advisor to ensure that everything is structured correctly.
Managing Payments with Amortization
If you plan on keeping your old property as a rental property, another tactic to keep payments manageable is by extending the amortization on your existing property. By doing so, your monthly obligations are lower, making it easier to qualify for and manage two mortgages. On the purchase of the new home, I would always opt for the highest amortization, and you could always use your prepayment privileges to pay down the mortgage quicker.
Using Rental Cash Damming to Your Advantage
If your old home becomes a rental, you can employ a strategy called rental cash damming. Here's how it works:
Use the rental income to pay down your new primary residence's mortgage.
Borrow from the Home Equity Line of Credit (HELOC) to cover the rental expenses.
This turns your non-deductible mortgage debt into a tax-deductible loan over time.
This powerful tax strategy can accelerate your wealth-building plan while maximizing your mortgage tax-efficiency. It’s important that everything is structured properly and that you again work with a team of professionals.
A Long-Term Exit Strategy
If you keep your old home as a rental, in 10 years or so if market conditions are favorable, you might decide to sell the property. This can unlock further capital to pay down the mortgage on your primary residence.
Selling Instead of Renting
Of course, not everyone wants to manage two properties. If being a landlord doesn’t appeal to you, selling your current home and using the proceeds to purchase your new one is another option. This is especially worth considering if your equity position doesn’t support keeping the property.
I recently worked with clients who were upsizing from a townhome to a single-family home. After running several scenarios, we determined that selling their old home was the best option. They didn’t have enough equity to retain the property, and buy their new home within their desired price range without bringing funds out of pocket. I guided them through the timing of their sale and purchase, ensuring a smooth transition.
Down Payment Considerations
When buying a new home, one key decision is whether to put 20% down or opt for a lower down payment and pay an insurance premium. Each route has its pros and cons depending on your cash flow, investment goals, and long-term plans. A tailored strategy helps ensure you're making the smartest choice for your unique situation.
Budgeting for the Upgrade
Upsizing generally means higher monthly payments. That's why budgeting is crucial. With every pre-approval, I provide a detailed budget that includes monthly expenses and closing costs. This ensures clients are financially comfortable and confident when making an offer.
Final Thoughts
Upsizing from a condo or townhome to a detached home can be an exciting step in your journey, but it comes with a complex web of financial decisions. With expert advice and a customized strategy, you can make the move seamlessly and sustainably.
Ready to explore your upsizing options? Let’s connect and map out the plan that’s right for you.