To sell or not — the debate for homeowners with low-interest mortgages

For homeowners considering selling, there are some current financial challenges that may feel daunting, but there are also some recent opportunities that can help address those concerns. Challenges include giving up a mortgage with a low interest rate for a higher rate, paying capital gains taxes on the sale, and incurring higher property taxes on a new home.

Homeowners lucky enough to have an interest rate at or below 3% now find themselves in a predicament. Whether those homeowners bought at a low interest rate or refinanced during the pandemic era, what was once a smart financial decision is now chaining them to their current home. It’s what some experts call “golden handcuffs.“

“I’ve heard from many homeowners over the past couple of years that they feel locked in to their low refinanced mortgage rate,” says Megan Micco, a Berkeley real estate agent who works with Compass. “This can feel constraining when personal circumstances change and the need for a move arises. However, help is on the horizon.”

The Federal Reserve recently lowered rates and signaled a shift in its future rate policies, opening a window of opportunity for homeowners to break free from these golden handcuffs and reconsider selling. 

Dropping interest rates

Over the past few years, the Federal Reserve took aggressive steps to curb inflation by raising interest rates. These hikes contributed to higher mortgage rates, which increased the cost of purchasing a home. For sellers, this has meant fewer buyers, longer time on the market, and often lower sale prices.

As inflation has cooled, the Federal Reserve lowered interest rates and is forecasting a series of further cuts over the next 24 months. This is good news for the real estate market, as it could reduce mortgage rates in the near future.

For homeowners with low-interest mortgages, the prospect of selling may now seem less daunting. While rates are not expected to return to those historic lows, the gradual reduction may narrow the gap enough to make selling a more palatable option. Other financial and tax factors may help, as well.

Why selling may make sense

Here are several reasons that it might still make financial and personal sense for a homeowner with a low-interest rate to consider selling.

Home values in Berkeley and the surrounding areas have appreciated significantly over the past decade. According to data from the California Association of Realtors, median home prices in Berkeley increased by over 80% from 2013 to 2023, with the median home price now exceeding $1.5 million. This has built considerable equity for homeowners. Even if current mortgage rates are higher than previous rates, the equity gained from selling can provide opportunities for reinvestment, paying off debts, or funding a new home with a larger down payment, thereby reducing the impact of a higher mortgage rate.

Capital gains taxes

Another impediment homeowners may face when selling is capital gains taxes. However, the federal tax code allows for capital gains exclusions of up to $250,000 for individuals and $500,000 for married couples on the sale of a primary residence. So if a couple bought a home for $500,000 and sold it for $1 million, the $500,000 gain they made would not be taxed. However, sellers still face taxes on gains that exceed these thresholds. For example, if the same couple sells the house for $1.4 million, they would face taxes on the $400,000 in gains beyond the exclusion limit. 

Property taxes

In addition to capital gains taxes, selling and purchasing a new home often comes with the reality of higher property taxes. California’s Proposition 13 has kept property taxes tied to the purchase price of a home, so people who have been in their homes a long time are paying much lower property taxes than they would on a newly purchased property. This also makes selling a daunting financial decision for many.

Fortunately, California’s Proposition 19, which went into effect in 2021, provides a way for eligible homeowners (those 55 and older, severely disabled, or victims of natural disasters) to transfer their existing property tax basis to a new home anywhere in the state. People in these categories can sell their home and maintain their current lower property tax rate, even if they purchase a more expensive property. Proposition 19 allows this transfer up to three times in a lifetime and can be a significant financial relief.

Navigating the decision to sell

For homeowners feeling the weight of golden handcuffs, it’s important to evaluate the situation carefully. 

Understanding the local market is crucial. Working with a knowledgeable real estate agent who can provide insights into current buyer demand, home values and future market trends is essential. 

While interest rates are a key factor, they’re not the only consideration. Reviewing one’s broader financial situation, including home equity, retirement goals and tax implications, can help someone make a more informed decision. A mortgage broker can also provide insights into loan options that might mitigate the impact of a higher mortgage rate.

“I always advise my clients to let their personal family situation dictate their decision to buy or sell a home,” says Micco. “It’s impossible to time the market, and worrying about when and if mortgage interest rates will change just creates stress for most people. If you need to sell, work with the best real agent you can find and let them guide you through the process, regardless of the macroeconomic environment.”

Breaking free from the golden handcuffs of low mortgage rates is a difficult decision for many East Bay homeowners. But with the Federal Reserve’s recent moves signaling potential rate reductions and a shifting real estate market, now may be an opportune time to reconsider selling. By taking a holistic look at one’s financial situation, personal needs, and the evolving market conditions, homeowners can make a well-informed decision that aligns with their long-term goals.