Talking about mortgages and financing may be one of the least glamorous aspects of buying or selling a home. But, there’s just no getting around this discussion since real estate transactions involve such high dollar amounts.
When upgrading, selling your existing home first is the most traditional path and the financing is relatively straightforward. Going this route is easier and less stressful in most cases. However, real estate transactions aren’t always simple in today’s market, and the journey from your old house to your new home is rarely linear.
Buying before you sell allows you to secure a house that you might have otherwise missed out on. But how do you carry the costs of two properties before you successfully sell your own? That’s where bridge financing comes in.
What Is Bridge Financing?
Other types of mortgages are well known. You buy your first home with a conventional mortgage. Once you build equity, you may decide to apply for a second mortgage (also called a home equity loan) to fund another purchase or investment.
Bridge financing is a mystery to many people since it is used far less frequently. It gets its name because it bridges the gap whenever you need to buy first and then sell later.
Though similar to a home equity loan in that it allows you to borrow against the value of your house, there are two distinct differences.
- The timing. You can apply for bridge financing when you have an offer on your existing home but the sale hasn’t closed yet. This allows you to proceed with a purchase before receiving the funds from your transaction.
- The duration. A bridge loan is for the very short term, up to 12 months, but usually 90 days or less. As soon as your sale closes, you pay off the principal of the loan in addition to any interest it has accrued.
Are you facing any unique challenges selling your home today? The posts below might help:
- Do I Really Have to Update My Home Before Selling It?
- Why Did My Neighbour’s House Sell but Mine Didn’t?
- Can You Successfully Sell a House With a Stigma?
What Are the Advantages of Bridge Financing?
The main advantage of bridge financing is that it allows you to act fast without worrying about closing your transaction first. Speed is often critical when buying or selling a home. It becomes even more so when the market is working against you, as it almost always will at one point in your journey.
- In a buyer’s market, buying your home is typically much easier than selling. You’re less likely to need bridge financing in this case. However, you may still want to buy first if your tastes are very specific and you don’t want to miss out on a particular home.
- In a seller’s market, buying can be very difficult while selling is usually easier. Bridge financing is more practical in this case because you can be reasonably confident that your own house will sell quickly.
The Downsides of Bridge Financing
Obtaining bridge financing can represent some risk depending on what the current market is doing. Here are a few downsides to be aware of.
- Interest rates are usually higher than with a conventional mortgage. This will have minimal impact if your house sells and you quickly pay off the loan, but charges can add up if it takes longer to close than you anticipated.
- You could find yourself carrying two mortgages if your transaction falls through for any reason.
Getting to know the market is always a good idea before listing your home for sale. The resources below will give you a solid background:
- What Everyone Needs to Know About Selling Their First Home
- FSBO vs Real Estate Agent Assisted Sales: What’s Better?
- What’s in Your Listing Agreement?
Are There Alternatives to Bridge Financing?
It never hurts to explore all of your options when upgrading your home. An experienced real estate agent and mortgage broker can help you analyze the market and your risk tolerance. And depending on the situation, you may not need bridge financing at all.
- A Home Equity Loan or HELOC (Home Equity Line of Credit) can be a better option if you plan far enough in advance. You must still use your home as collateral, but you have more time to repay the loan and the interest rate will probably be lower. The downside is that you must apply and be approved for a home equity loan before you list your home on the market.
- A personal unsecured loan is an excellent option if you can get it. You can place the down payment to ensure you don’t miss out on your dream home. Interest rates can be higher, but not having to use your house as collateral can be far less stressful.
- You can place an offer on your next home with a condition of sale. This has a high chance of success in a buyer’s market. In a seller’s market, you may lose out to another buyer as unconditional offers become the norm.
If you decide that you really don’t want to use bridge financing, the best way to avoid it is to simply wait until your sale closes successfully before placing offers on a new home.
You may be concerned about missed opportunities whenever you must wait until your house sells before taking your next step. That’s why it’s best to consult with an experienced agent can help you evaluate the market to determine your risks versus the possible advantages. When you know all of the facts, you are empowered to make your next move with confidence.
Do you have questions about upgrading your home in today’s changing market? Our experts are standing by to help throughout the process. You can contact us right here or call 905-332-9223 to connect with our offices immediately.