In the complex world of real estate transactions, timing can be everything. Whether you're a first-time homebuyer or a seasoned property investor, the question of whether to buy or sell first often arises. One financial tool that can help bridge the gap between buying a new home and selling your current one is a bridge loan. But what exactly is a bridge loan, and when is it the right choice for your real estate journey?
To shed light on this topic, we turned to Lisa Okun, an experienced mortgage agent who has guided countless clients through the intricacies of home financing. Her insights provide valuable guidance for anyone considering this short-term lending option as part of their property transition strategy.
A bridge loan is a short-term financing solution designed to provide immediate cash flow for your new mortgage when you're in the process of buying a new home before selling your current property. Typically lasting around 45 days, these loans can be a crucial tool in managing the timing of real estate transactions.
According to Okun, "A bridge loan is a short-term loan (often around 45 days) that provides immediate cash flow for your new mortgage. If you buy your next house before firming a sale on your current property, you might need a bridge loan to pay for the new house while you wait for your current home to close."
Key Features of Bridge Loans
Short-Term Nature: Bridge loans are not intended for long-term financing, usually lasting only a few weeks to a few months.
High Interest Rates: Due to their short-term nature, bridge loans often come with higher interest rates compared to traditional mortgages.
Daily Interest Calculation: Okun notes that "Bridge loans tend to have high interest rates that are calculated daily."
Flexible Funding: Lenders may offer up to 100% of your costs, including down payment and closing costs.
Repayment from Sale Proceeds: The loan is typically repaid once your current home sells and you receive the proceeds.
When to Consider a Bridge Loan
Bridge loans can be particularly useful in certain scenarios:
Hot Real Estate Markets: In competitive markets where properties sell quickly, a bridge loan can give you the flexibility to make an offer on a new home without contingencies.
Mismatched Closing Dates: If the closing date on your new home purchase is earlier than the sale of your current home, a bridge loan can cover the gap.
Opportunity Purchases: When a dream home becomes available and you need to act quickly, a bridge loan can provide the necessary funds.
Avoiding Temporary Housing: Bridge loans can help you avoid the need for interim housing between selling your old home and moving into your new one.
The Pros and Cons of Bridge Loans
Pros:
Allows you to buy a new home before selling your current one
Provides flexibility in competitive real estate markets
Eliminates the need for contingent offers
Can reduce stress and logistical challenges of moving
Cons:
Higher interest rates compared to traditional mortgages
Additional fees and closing costs
Risk if your current home doesn't sell quickly
Potential for financial strain if managing two mortgages
Best Practices for Using Bridge Loans
Okun offers several key pieces of advice for those considering a bridge loan:
Plan Ahead: "Before you start house hunting, get clear on your criteria for the new house. In anticipation of needing to sell your home, make a list of work that needs to be done to get top dollar for it and start chipping away on those projects as you house hunt."
Run the Numbers: "Work with a mortgage agent who can help you run the numbers. You need to know exactly how much you want your new mortgage to be and know the worst-case scenario for the sale of your current home."
Consider Closing Timelines: "If you choose to buy first, before you sell, buy on a long closing, for example, 90 days. Then you have 90 days to sell your place."
Factor in All Costs: Okun warns, "When you're thinking about your sale proceeds, you have to take into account not just how much down payment you want on the new house, but also your closing costs (for example, land transfer costs, legal and Realtor fees)."
Choose Your Lender Carefully: "If you may end up needing a bridge loan, we want to think about where we want to send your new mortgage," says Okun. "In order to get a bridge loan, you have to have your mortgage with that same lender. You cannot get a bridge loan unless you have a firm agreement of purchase and sale on your current home."
Have Deposit Money Available: "Buyers should plan to have their deposit money available.... They may need it in order to make their offer … in advance of their sale proceeds."
Alternatives to Bridge Loans
While bridge loans can be a valuable tool, they're not the only option for managing the transition between properties. Consider these alternatives:
Home Equity Line of Credit (HELOC): Tap into your current home's equity for short-term financing.
Contingent Offer: Make your offer on a new home contingent on the sale of your current property.
Rent-Back Agreement: Negotiate with the buyers of your current home to rent it back for a short period after closing.
Temporary Housing: Sell your current home first and move into temporary housing while searching for your new home.
Timing the Market vs. Personal Needs
When it comes to timing your move, Okun emphasizes the importance of personal circumstances over market conditions. "You only know in retrospect anyway what happens with the market," says Okun. "The process is stressful enough without thinking about market conditions that are completely out of your control."
Instead of trying to time the market perfectly, focus on your individual needs and financial situation. Consider factors such as:
- Your current living situation
- Job stability or potential relocations
- Family needs (e.g., school districts, space requirements)
- Long-term financial goals
Making the Decision: Buy First or Sell First?
Ultimately, the decision to buy first or sell first depends on your unique circumstances. Here's a quick breakdown of the pros and cons:
Selling First:
Pro: "You know exactly how much money you have to spend on your next place."
Con: "This can put a lot of pressure on your house hunt — you need to find a place to go."
Buying First:
Pro: "You know where you're going, and you know what your timeline is."
Con: "You may not sell your home in time to align with the closing of your new home, and you don't know how much your place is going to sell for."
Bridge loans can be a powerful tool in your home buying and selling strategy, offering flexibility and peace of mind during what can be a stressful transition. However, they're not without risks and costs. By carefully considering your options, planning ahead, and working closely with experienced professionals like mortgage agents and real estate advisors, you can make informed decisions that align with your financial goals and personal needs.
Remember, as Okun wisely advises, "It's important to ask yourself which scenario you can most afford, both financially and in terms of stress." Whether you choose to utilize a bridge loan or explore other financing options, the key is to approach your real estate journey with a clear understanding of your objectives and a solid plan to achieve them.
