
In competitive real estate markets, especially where there is low housing inventory, buying a new home before selling your existing one usually makes great sense. However, the logistics and economic pressure often prove too much for most people. This is where solutions such as a bridge loan, HELOC, and other forms of financing might make this transition easier. In this article, we will discuss why "buy before you sell" solutions are important and how they work in relation to bridge loans.
Why Buy Before You Sell?
The biggest stumbling block in the market today is the fear of becoming "homeless" after selling a home without securing a new home. The reality: With inventory shortages and fast-moving real estate markets, this scenario is all too common. By selling your home first, you may leave yourself scrambling to locate a suitable replacement property, resulting in undue stress and potentially temporary housing costs.
"Buy before you sell" strategies enable homeowners to:
Remain in their existing home while house hunting
Avoid the hassle of having to secure temporary housing
Decorate and show their existing home in a way that could sell it more effectively
Lessen the chance of losing a purchasing opportunity
Bridge Loans Overview
One of the best "buy before you sell" solutions is a bridge loan. A bridge loan allows homeowners to tap into the equity of their existing home for the down payment on a new property before selling the existing one.
What is a Bridge Loan?
A bridge loan is a short-term loan "bridging" the gap between buying a new property and selling an existing one. It's great for homeowners with significant equity built up in their current home, but a lack of immediate access to liquid funds for a new down payment.
In the case of a bridge loan, owners can secure a new property without having to sell first; thus, family members can move comfortably, having avoided disruption in order to have a better chance at being more flexible while staging and preparing their old home for sale.
How Bridge Loans Work
Bridge loans are typically secured by the equity in the departing residence, and they typically offer 6 or 12 months of time to repay the loan by selling their departing residence.
This is how a typical bridge loan works:
Pre-Approval: The buyer submits an application and gets pre-approved for a bridge loan. This takes a few weeks in terms of time, and at this stage, the buyer incurs no costs whatsoever.
Property Search: The buyer can stay in their present home for all this time while looking for a new one. They don't begin to pay interest until funds are drawn to finance the closing on the new property.
Closing: When the owner finds a new home, he applies for the funds of his bridge loan as a down payment on his new home and closes on his new house before actually selling the one he currently owns.
Selling: After occupying the new property, the owner can market his old home. Once the home sells, the seller will use the sale proceeds to pay off the balance of his/her bridge loan.
Chief Benefits of Bridge Loans
Convenience: Home owners can live in their existing home until they close a new one and avoid the burden of closing two homes simultaneously.
No Out-of-Pocket Payments: Most bridge loans are interest-only, therefore homeowners do not pay on the loan until it gets paid.
Flexibility in Staging: Home owners may stage and prepare their existing home to sell after they move out, making their home more attractive to the buyer; they thus sell it for a better price.
Access to Equity: They enable homeowners to tap into their equity from the departing house, thereby not requiring liquid cash to fund a new property.
Costs and Considerations of Bridge Loans
Bridge loans are an effective solution as they provide convenient access; however the cost is relatively high in comparison to other conventional loans.
Interest Rates: Bridge loans attract a higher interest rate, between 10% and 12% at the release of this podcast. This is because the duration that this loan covers is short-term and has some associated risk.
Loan Duration: Most bridge loans are available for six months. There are some lenders who can offer longer.
Points: The borrower would also pay points of this loan. This could be between 1% and 2.5% of the amount loaned.
In several cases, convenience and the opportunity for an increase in the sale price of the current home outweigh the extra cost of having a bridge loan.
Bridge Loan Alternatives
While bridge loans are one very popular option, under the current conditions of your finances, there could also be other options.
Home Equity Line of Credit (HELOC): A HELOC lets a homeowner tap into the equity of his or her current home as a down payment on another property. The advantage to using a HELOC is that often, you will have a lower interest rate than you might otherwise have gotten from a bridge loan. One disadvantage to taking out a HELOC is that you may not be able to get as much money from the HELOC and the process may take longer.
Private Loans: There are at times private investors or smaller lenders that will also lend bridge loan options, which are a bit more relaxed as there are fewer hoops to jump through. Loans to these sources are, of course, less structured, though costs and conditions vary depending on the lender. These types of loans are sometimes referred to as “Hard Money Loans”.
Is a Bridge Loan Right for You?
Not all homeowners have the same needs, so determine your financial situation and the current market conditions. If one of the following criteria applies to you, a bridge loan may be the excellent solution for you:
You have high equity in your existing home
You want to avoid temporary housing or moving twice
The real estate market is competitive, and you want flexibility in your timing
You want to invest in staging your current home in order to get the best price.
And if you are not comfortable with higher interest rates, or just need less capital, the better option would be a HELOC or a traditional mortgage.
Conclusion
Purchasing a new home before selling the current one is one rather stressful procedure, but the bridge loans and other "buy before you sell" solutions are flexible and convenient alternatives that can make that transition less complicated. With the right plan in place, a homeowner can avoid a dreaded double move and will position their current property for a more productive sale. Consult with your agent and a qualified mortgage broker or loan officer to determine which best solution works with your financial goals and personal situation.
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