Using Equity In An Old Home To Buy A New One
As a homeowner, you undoubtedly are aware that you are going to have to sell your home at some point in time. Even if you plan to hold on to it for some time, life can throw things at you that require moving.
Although homeowners may get to the decision to sell from different paths, what does not change is the question of whether to sell or buy first. It is a bit of a catch-22 if you think through the issues you have to confront.
Okay, what if you just sell first to be safe? Well, you have a problem. The day escrow closes, you are homeless. You can rent a place, but do you really want to unpack, pack and then unpack again? Kiss your plants goodbye as well.
I have had personal experience with this situation. When growing up, my parents sold our home first. The subsequent purchase fell through. We ended up living out of boxes at the home of a family friend for seven weeks. Not fun!
What if you go in the opposite direction? Yeah, I will just buy a home and worry about my old one later. Only the boldest of us would try that in the current real estate market. I doubt many of us are that bold.
The obvious problem is you end up owning two homes at the same time. Even if you can somehow find a bank to give such financing, are you going to be able to make the payments on both homes each month? Probably not.
Is there a happy medium solution out there? There is never a perfect answer, but many are turning to bridge loans as a means to handle this problem. This is even truer in a market where traditional financing is under stress.
The problem you face is how to get the equity from your old home to use as the down payment for the new one. A bridge loan solves this problem by acting as a short term bridge loan that effectively moves that equity.
The downside to a bridge loan has to do with time. Since they are only issued for three to five years, the lender makes money by charging high interest rates and points. They are, after all, supposed to be temporary loans.
The problem that can arise is if you have problems selling the old home. A bridge loan is not a problem if you need four months to sell it. If you need 12 months, the cost can be prohibitive and really make you regret getting the loan.
Bridge loans have one purpose. They are designed to bridge financial gaps. They are perfect for this purpose, but not much else. Use them correctly and you will love them. Use them incorrectly and you will not be so happy.
