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Selling a Home
> Other
Financial Considerations
Other Financial Considerations
DISCHARGING YOUR EXISTING MORTGAGE
It's important to understand the terms of your current mortgage when you're planning to sell your home. Review your mortgage documents and meet with your lender to discuss your options. Many people, when selling their home, use the proceeds from the sale to "discharge" or pay off their mortgage loan. If you have a fully "open" mortgage, you can discharge it at any time without penalty. However, if yours is a fully "closed" mortgage, discharging it may require you to pay substantial penalties, often in an amount equal to several months interest payments. There are ways to avoid these penalties, such as allowing the buyer to "assume" your mortgage, or taking a "portable" mortgage with you when you sell your present home and applying it to the home you buy. Additionally, and depending on your specific sales objectives, you may be able to time the sale's completion to coincide with the end of the mortgage term.
MORTGAGE "PORTABILITY"
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A portable mortgage allows you to take your mortgage with you (without penalty) if you sell your present home and buy another one. This can be very beneficial, particularly if the interest rate on your mortgage is lower
than the market rates at the time of your move. If your new home requires a larger mortgage amount, the additional funds required can usually be borrowed at the current market rate. The resulting mortgage payment is "blended" to combine the two rates and mortgage amounts. e.g.; Existing mortgage: $50,000 @ 10% Additional funds: $25,000 @ 11.5% New "blended" mortgage: $75,000 @ 10.5%
OFFERING AN ASSUMABLE MORTGAGE
This feature allows the purchaser of your home to take over your existing mortgage and assume responsibility for it as part of the price they're paying for the house. Here is an example: The purchasers buy your house for $150,000 and your existing mortgage on the home is $110,000. In order to complete the transaction, the purchasers agree to pay $40,000 cash to you and assume the $110,000 mortgage. This is an attractive selling feature if the interest rate on your mortgage is lower than prevailing market rates.
TAKING BACK A MORTGAGE
To help a buyer purchase their home, some sellers will "take back" a mortgage, which means they will loan money to the buyer from their home's equity, in essence financing a portion of the purchase. This type of arrangement is commonly known as a "vendor take-back" mortgage. e.g.: Purchasers are willing to buy your home for $200,000. The purchasers have qualified for 75% financing through their bank, but don't have sufficient funds for the 25% down payment ($50,000). You are prepared to "take back" a one-year mortgage for $20,000, so the couple only has to come up with $30,000 in cash for their down payment.
BRIDGE FINANCING
If you are planning to buy your next home before the sale of your current home is complete, you may want to consider "bridge financing." Bridge financing enables you to borrow an amount equal to (or less than) the net proceeds you're expecting to realize on your sale - and to use these borrowed funds to purchase your next home. When the sale on your current home closes, you use the proceeds to pay off the short-term bridge loan plus interest. Bridge loans can also be arranged to access some of your present home's equity when you want to build a new home. Or, if the sale of your home is conditional on your making certain repairs to the property, you may be able to arrange a bridge loan or a "home-equity loan" to help finance the cost of these repairs.
TAX IMPLICATIONS OF SELLING YOUR HOME
Under most circumstances, you will not have to pay tax on any capital gain (the increase in your home's value) when you sell your primary residence. However, if you are selling a vacation property, talk with your accountant about changes in legislation since 1992 regarding capital gains taxes. You will be obligated to pay the GST applied to fees for professional services provided by your Realtor, lawyer, etc.
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