With mortgage interest rates remaining in the mid 6-7% range, many buyers with plans to downsize this year may feel “stuck”. However, the real estate landscape of 2025 presents a unique opportunity.
While higher rates might seem daunting at first glance, several factors make this an advantageous time to transition to a smaller home.
The market currently favors downsizers. Over the past few years, the surge in home prices means long-term homeowners likely have substantial equity in their current properties. This equity can serve as a powerful tool, allowing for a smaller mortgage on the new property.
Timing The Mortgage Interest Market?
Even professional economists and traders, with access to sophisticated models and real-time data, often fail to predict rate changes accurately. The market also tends to price in expected rate movements well in advance. By the time a trend becomes obvious, it's already reflected in real estate prices. And historical patterns suggest that once rates do decline, competition for smaller homes will likely intensify, potentially driving prices higher.
Retirees considering relocation should think beyond interest rates, and prioritize total homeownership affordability.
HECMs
Home Equity Conversion Mortgages (HECMs), specifically designed for homeowners 62 and older, allow buyers to purchase a new home while making no monthly mortgage payments. Instead, this adjustable-rate mortgage (ARM) loan is repaid when the homeowner leaves the property. This option can significantly enhance monthly cash flow in retirement.
During the HECM, a homeowner is responsible for property taxes, insurance, and HOA dues, but there are no principal or interest payments. Many HECMs come with a line of credit to access additional equity after one year.
This is the only type of “reverse mortgage” that is FHA-insured. A HECM (reverse mortgage) includes several key fees: a 2% upfront mortgage insurance premium on the maximum claim amount (which can be financed into the loan), a 0.5% annual premium on the remaining balance, standard closing costs for services like appraisal and title search, an origination fee of $2,500 minimum (capped at $6,000, calculated as 2% of the first $200,000 of home value plus 1% above that), and a monthly servicing fee capped at $30-35 depending on the interest rate adjustment frequency.
A Seller’s Market
While inventory is up 16.8% YTD over 2024, it’s well below pre-pandemic norms and still tight. As of this writing, there’s currently a 3.5-month supply of homes, well below a more balanced market at 4.6 months. Supply is not keeping up with demand, which means home prices should be supported well into the future.
FOMA: Fear of Missing Appreciation
While waiting to downsize while hoping for an interest rate decline may seem prudent, some of the fastest-appreciating markets in California are in the Central Coast regions. These areas offer mild climates and access to desirable amenities.
A key factor to consider when delaying your downsize is the potential appreciation you’ll miss. Homes in the $600,000 to $900,000 range are selling the most briskly, and in our market, we’re expecting an annual appreciation of just over 6%.
For a home priced at $700,000, waiting six months would bring the cost to $721,141, an increase of 3.02%. And in one year the same house would be valued at $742,920. This also means that the amount of cash to close increases from $180,000 to $190,730.
Mobility: Is a Bridge Loan the Answer?
What happens if you need to close on your new home before the old one sells?
Larger, higher-priced homes tend to sell more slowly, a challenge that can make downsizing trickier. In the last quarter of 2024, homes remained on the market for 41 days on average, up from 36 days the previous quarter. Still, 15% of homes sold above list price.
One option is a bridge loan. This temporary financing solution allows homeowners to purchase their new, smaller home before selling their current property. Once the larger home sells, the proceeds can be used to pay off or significantly reduce the mortgage on the new property. Bridge loans typically carry higher rates. But there’s another approach.
HELOCs vs. Bridge Loans
A First Mortgage Home Equity Line of Credit (HELOC) will save the home buyer a substantial amount of money over a Bridge Loan. Bridge loans are expensive and they may tie up the purchase and the sale of both properties. Each case will vary, but a HELOC may be a better way to ease the transition.
Other Affordability Factors
Property Taxes
For anyone 55 or older, Proposition 19 allows California homeowners to transfer their lower property tax base from their current home to a new home anywhere in the state, up to three times in their lifetime. Before Prop 19, this transfer was limited to certain counties and could only be done once.
Your new home can be of higher value (with an adjustment added for the difference), and there's no longer a requirement that the new home be of equal or lesser value to maintain the tax benefit. This helps longtime homeowners who may have been reluctant to move due to potentially dramatic increases in their property taxes, allowing them greater flexibility to downsize, while preserving their Proposition 13 tax savings.
“Affordability” goes beyond interest rates and appreciation.
The cost savings of downsizing extend far beyond a mortgage payment—the reason we refer to Twin Oaks as “smart-sized” homes. This can include lower insurance premiums and decreased maintenance and utility costs.
Lower Energy Costs.
Energy efficiency presents another compelling reason to downsize in 2025. New, smaller homes incorporate modern energy-saving features that can substantially reduce monthly operating costs.
Lower Maintenance Costs.
A new, efficiently scaled home means less maintenance—no lawn care, pool maintenance, or repairs. Many buyers benefit from the improved physical accessibility of a new build, with hallways, doorways, and rooms easier to navigate for anyone with limited mobility.
Better Return on your Discretionary Spending.
In a 55+ community like Twin Oaks, downsizing also brings with it a much more rewarding lifestyle, delivering a great return on your discretionary spending. At Twin Oaks, our HOA fees cover national award-winning amenities that deliver fitness and wellness activities, social and culinary events, and resort-style facilities that would cost more if purchased “a la carte”, at market rates.
Twin Oaks: It’s Not Just a Phase
Many large-scale 55+ developments build seemingly forever, sprawling through dozens of phases. But boutique-scale Twin Oaks, which is located very close to shopping and services, will ultimately have just 168 homes. Our gated enclave is currently over half built and occupied.
The decision to downsize ultimately extends beyond purely financial considerations. Lifestyle factors, combined with the current market dynamics and financing options, may make 2025 the perfect time to embrace a new, “smart-sized” home.