Downsizing with a mortgage: paying off your loan and buying smaller in Florida

Can you downsize if you still owe on your house?

Yes. A mortgage does not stop a sale. The lender has a lien on the home, and the lien is cleared when the loan is paid at closing. Sellers with a balance on a Tampa home list, negotiate and close the way everyone else does. The difference shows up on the closing statement, where the payoff appears as one of the largest lines.

What changes is the question you need to answer first: after the payoff and the costs of selling, how much money do you actually hold? Everything else, including whether you can pay cash for the next place, follows from that number. Our guide to estimating net proceeds builds the full seller net sheet line by line, and the Costs and Money page lists the charges on both sides of a move.

How the payoff works at closing

You do not send the lender a check yourself. The title or closing company asks your servicer for a payoff statement, pays the amount from the buyer's funds at closing and records the release afterward. Three details are worth knowing.

1. The payoff is more than the balance on your last statement. It includes interest accrued since your last payment and may include other charges. Interest keeps accruing daily, so the statement carries a "good through" date and a daily amount in case closing slips.
2. You can request the figure in writing. Under section 701.04 of the Florida Statutes, a mortgagee or servicer must send a payoff letter within 10 days of a written request. The request can come from the borrower, the record title owner or someone lawfully acting for them. The letter itemizes principal, interest and other charges and states the per-day interest after the stated date.
3. The lien is released after payoff. The same statute gives the lender 60 days after the loan is paid to sign, record and send you the release of the mortgage. Check the county record later to confirm it was recorded.

Other loans secured by the home come out of the same proceeds, including a home equity line and a reverse mortgage. Ask each lender for a payoff. If you are weighing a reverse mortgage instead of selling, read reverse mortgage vs downsizing.

Sources: Florida Statutes s. 701.04.

Equity versus proceeds: why they are not the same number

Equity is the value of the home minus what you owe. Proceeds are what reaches your bank account. The gap between them is the cost of selling.

• Equity on paper: estimated market value less the mortgage balance.
• Proceeds in hand: the sale price less the payoff, commissions (which are negotiable), documentary stamp tax on the deed, title charges, any association fees, property tax prorations and repairs you agree to.

Florida charges documentary stamp tax on the deed at 70 cents per $100 of consideration. Under the standard Florida purchase contract the seller usually pays it, though contracts can assign it differently. A homeowner who counts the full equity as spendable cash is surprised at closing, which is why a written net sheet from a title company or agent is worth requesting before you shop.

Source: Florida Department of Revenue, documentary stamp tax.

A worked example, with made-up numbers

This example is hypothetical. It uses round numbers to show the method and says nothing about any real home, price or rate.

The paper equity was $340,000 ($520,000 less $180,000). The money available for a purchase is $48,000 less, before any tax. Now suppose the smaller home costs $300,000.

Buying the next home: cash versus a small mortgage

In the hypothetical, $292,000 is not enough to pay $300,000 in cash. That leaves two broad choices.

A new Florida mortgage carries two state charges you do not pay on a cash purchase: documentary stamp tax on the note and mortgage at 35 cents per $100, and a one-time nonrecurring intangible tax of 2 mills on each dollar, which is 0.2 percent. On the hypothetical $50,000 loan that is about $175 and $100. On a $150,000 loan it would be about $525 and $300. Your lender's closing disclosure shows the exact figures, plus its own fees.

Which path is better depends on interest rates, how much you hold in savings and how you feel about a monthly payment in retirement. Neither is automatically safer. Keeping a cushion is a real benefit of a small loan, and a paid-off home is a real benefit of cash. Our guide on the hidden costs of downsizing shows what else to hold back for, and rent or buy after downsizing covers a third option.

Sources: Florida Department of Revenue, documentary stamp tax; Florida Statutes s. 199.133.

Getting a mortgage in retirement: income and age

Many people assume a lender will refuse a retiree or count only wages. Federal rules say otherwise, and they are worth knowing before you apply.

Age cannot be used against you

The Equal Credit Opportunity Act is carried out through the CFPB's Regulation B. For most applicants, section 1002.6(b)(2) says a creditor shall not take an applicant's age into account. There are limited exceptions. Age may appear in a statistically valid credit scoring system, but an applicant age 62 or older cannot be given a negative value for age, and applicants 62 or older must be treated at least as favorably as younger ones.

Retirement income counts

Regulation B also says a creditor shall not discount or exclude an applicant's income because it comes from part-time work or from an annuity, pension or other retirement benefit. The CFPB's consumer guidance adds that Social Security and Supplemental Security Income are protected income sources as well. A lender may still evaluate the amount of the income and how likely it is to continue, and it may consider how long your income is expected to last compared with the length of the loan.

What lenders must check

Mortgage rules under Regulation Z require a lender to make a reasonable, good-faith determination that you can repay. In doing so it considers your current or reasonably expected income or assets other than the value of the home, and the commentary names retirement benefits and amounts vested in a retirement account among the items a lender may consider. Expected income must be reasonable and verified with third-party records. In practice, expect to supply award letters, pension statements and bank or brokerage statements. Each lender sets its own documentation list and how it treats withdrawals from savings, so ask a loan officer early which statements they need and how they count them.

If you believe a lender treated you unfairly because of your age, the CFPB is the federal agency that enforces these rules, and a Florida attorney can review your file.

Sources: 12 CFR 1002.6 (Regulation B); CFPB, does a creditor have to consider my part-time or retirement income; 12 CFR 1026.43 (Regulation Z).

Bridge options if the timing does not line up

The hardest part of downsizing with a mortgage is often the gap between buying and selling, because the old loan is paid only when the old home closes. At a concept level the options are these.

• Sell first, then buy. You know your budget, but you may need a rent-back from the buyer or a short rental.
• Use savings or a home equity line. A line of credit is a loan secured by your current home, so ask a lender about timing and about how it is paid off at closing.
• A bridge loan. Short-term financing against the old home, usually with higher costs. Ask for a full cost estimate.
• A sale contingency. Your offer depends on selling the old home. Sellers may see this as a weaker offer.
• Qualify for both payments. Some buyers carry two loans for a short time. A lender will count both payments when it checks whether you can repay.

Each of these has costs and risks that depend on your market and your lender. The full comparison, including the January 1 homestead date and hurricane-season timing, is in buy first or sell first.

Downsizing to pay off debt

People often ask whether to downsize house to pay off debt. A sale can clear the mortgage and, if you choose, other debts too, because the leftover proceeds are yours. Before you decide, weigh these points.

• List every lien and balance. Home equity lines and reverse mortgages are paid at closing along with the primary loan.
• Separate secured from unsecured debt. A credit card is not paid by the closing agent unless you instruct it. Paying it is your choice after the sale.
• Check the tax bill. Most long-time owners fall within the federal exclusion. Our guide to capital gains on a home sale in Florida explains the test.
• Price the next home's running costs. A smaller house can still carry higher insurance or association fees, so test the monthly budget.
• Keep an emergency reserve. Using every dollar to clear debt can leave you exposed to the next big repair.

If the sale price after costs does not cover the loan, do not wait. Talk to your lender and a Florida attorney about your options.

Downsizing to retire early

Selling a larger home can lower housing costs and release equity, which some people use to leave work sooner. The sale itself is only half of that plan. What matters is the monthly picture afterward: property tax, homeowners and flood insurance, association fees, a possible loan payment and the ordinary cost of living. In Florida, the property tax side also resets. Your Save Our Homes assessment cap does not follow you automatically, and the portability guide shows how a transfer can carry part of it to the next home. The portability and net proceeds calculator lets you try numbers.

How long the money has to last, and what to draw first, are questions for a fee-only planner or CPA, not for this page. The decision framework in is downsizing worth it is a good start, and downsizing mistakes to avoid flags the errors that tend to cost the most. The step-by-step plan puts the money steps in order.

When you want to talk through a sale with an agent, you can request an introduction. Introductions go to agents on the operating team at eXp Realty, so this is not a search of the whole market, and the agent, not this site, handles the sale.