It’s a fairly straight-forward scenario. You are selling your current primary residence. You don’t own other properties and have no interest in buying a new home immediately. Instead, you move out of your current residence, you stage your home for showing (and to seek top dollar sale price!), and you begin renting a new residence while your home is on the market.
The market is hot
Your realtor assures you that the market is hot (when is it not?) and your home will sell within weeks, no more than a month tops. You feel reassured and confident that you will likely have only one or two months of overlap while you simultaneously pay your mortgage AND your new rent payment. But then weeks turn into a month. Multiple months. You contemplate moving back in to your primary residence home.
In the meantime, how are you supposed to cover two housing payments for more than a month or two?
Creative financial planning
- You can stockpile cash in your emergency fund in anticipation of this scenario. This solution requires prudent planning and also may take a year or more to save enough money to cover the expenses related to paying a mortgage and a rent payment at the same time.
- You can take a “60-day rollover” from your IRA. This is a risky proposition because if you withdraw cash from your IRA before age 59.5 and you don’t put it back in your IRA within 60 days (not 61!), you will owe federal taxes, state taxes, and penalties on the withdrawal. Yes, you could access cash quickly, but the risk of paying taxes and penalties would seem to outweigh the advantages in most scenarios. Nevertheless, it’s an option.
- You could review your employer 401(k) retirement plan to see if you have a “loan provision” available to you. Typically you do and you can withdraw up to $50,000 or 50% of your vested account balance, whichever is smaller. This option is less risky than the 60-day rollover option in #2, above, since you are not under a short-term time restriction in paying yourself back the 401(k) loan. You would typically pay yourself back through payroll withholding over a 5 year term. Usually the prime interest rate is used and you pay yourself the interest. Of course, as soon as you sell your home you would pay back your loan in a “lump sum” into your 401(k) account.
- You could review taxable brokerage accounts for any positions that have little to no capital gain or, even better, a capital loss. You could sell these positions and withdraw the cash with little-to-no tax consequence. Again, once you sell your home, you could buy back the positions so long as you avoid the wash sale rule(s).
- You could take out loans. The most cost-effective option with debt is likely using a peer-to-peer lending platform such as Lending Club. Other options include a personal loan or equity line from your bank or credit union. To be clear, taking on debt is the option of last resort and some personal finance experts would say it’s not even an option. For our purposes, we like to put options on the table and make a fully informed decision.
And there you have it. Five ideas for bridging the gap while you are selling your home. Please let me know if you have other questions related to selling your home and figuring out how to bridge the gap to your next home. I’d love to help be your thinking partner on this topic.
– Kaleb Paddock, CFP®