Bridge LoansSarah Marrinan

Avoiding the Double Move (& Making Your Offer Competitive)

If you are a homeowner buying and selling at the same time, the juggling the double move can be exhausting and cause high anxiety. Many people find themselves renting storage units and staying with family or in short term housing after their home is sold and they haven’t found a new home to purchase.

Let’s face it, moving is never easy but most convenient way requires you to have your new home secured and ready for move in before you have to be out of your existing home.

There are ways to avoid making an extra move or a double move when you are ready to purchase another home but need the cash from your existing home for the down payment and expenses of the move. If you have a significant amount of equity in your home, you may be able to used a bridge loan to pay off your current mortgage while you wait for your home to sell. You can then use any extra cash toward a bigger down payment on your new home and that usually means better terms on your new mortgage and a more attractive offer to the seller of your next home.   

What is a Bridge Loan?

A bridge loan allows you to move while your current home is still being sold so you’re not stuck finding a temporary place to live if you can’t time both sales perfectly. Bridge loans are commonly used in tight housing markets where bidding wars demand competitive purchase offers without any contingencies. A bridge loan eliminates the need for a home sale contingency, making your offer more competitive in a tight housing market.

Standard lending guidelines for conventional loans don’t allow cash-out refinancing on a property listed for sale but a bridge loan lets you tap the equity you’ve built in your current home while it’s for sale to buy a new home. 

A bridge loan is a short-term mortgage you can use to access equity in a home you are selling in order to purchase a new home. If you don’t have a large amount of equity in your home, a bridge loan is not for you since you can only borrow up to 80% of the value of your home. So if your existing home will sell around $250,000, you must owe less than $200,000 to pursue a bridge loan.

Two more things to consider about bridge loans

  1. What are the bridge loan interest rates? If your current mortgage rate is low, paying the entire balance off with a bridge loan doesn’t make sense. If you borrow the equity you have you in your current home as a second mortgage, you’ll have a lower bridge loan balance and payment.
  2. Can you make interest-only payments until your home sells? Some bridge loan programs offer an interest-only option, which means you pay only the interest charges accruing each month. The interest rate may be slightly higher, but it will soften the impact of having two monthly mortgage payments.

 

Bridge Loans are Not For Everyone

When regulatory reform was passed, it was intended to focus on long-term loan commitments to protect borrowers from taking out loans they couldn’t repay. The new rules don’t apply to temporary or bridge loans with terms of 12 months or less, meaning you’ll have less protection and need to make sure you are making a good decision for yourself.

Ask yourself these questions:

  1. Do I have enough equity to qualify for a bridge loan? You can borrow up to 80% of the value of your home, so if you’re in an area where neighborhood values have dropped, you’ll want to come up with alternative financing.
  2. Can I afford the extra mortgage payments? Once you borrow against your equity and buy your new home, you’ll be carrying at least two, possibly three monthly mortgage payments, depending on how you use the bridge loan. This can add up fast and become unsustainable. You might have trouble making the payments on both mortgages if you have a hard time selling your current home.
  3. Am I comfortable with the higher interest rates and closing costs in exchange for the convenience and ability to move now? Lenders charge higher rates and fees on bridge loans to make it worth their while because you are borrowing only for a short time. 
  4. Am I sure I can get my home sold in under a year to pay off the bridge loan? Bridge lenders expect you will be able to pay off the loan within a year. If the balance isn’t paid by then, they can foreclose on your home. As a result, your credit and finances will take a massive hit, and you might be unable to repay the mortgages on both homes.

 

How tight on cash are you? Let’s say your new home it $450,000 and you have your existing home to sell around $250,000.  With good credit, you may be able to find a lender to do your new home loan with as little as 3% down ($13,500) plus your closing costs which include prepaid expenses (taxes and insurance) and lender fees at about $10,000 on this size purchase for a total required cash on hand at about $23,500. The expenses from your sale should come right off the price at closing. Those expenses usually included real estate sales tax, title fees, commissions and concessions to the buyer for repairs or closing fees. It’s not uncommon for these expenses to eat up 10% of your sales price (up to $25,000 on a $250,000 home) so make sure the remaining $225,000 will pay off the existing move before you jump into this process.

OK – so I can’t do the bridge loan but I am tight on cash. Now what?

So using the simple math scenario above, you have managed to save up just about $24,000 to make the purchase but you’re going to need some money for fixing up the old house or an interstate move. Some people turn to personal loans. Getting personal loans to help with moving expenses allows you to get the funds you need to cover your moving costs now and repay them later.   

Should you use a personal loan for moving expenses?

If you can’t cover your costs out of pocket or are worried about depleting your savings or racking up your credit card ahead of a move, you might need to borrow for some or all of your moving expenses but be VERY CAREFUL.  Applying for additional loans while in the process of getting a new mortgage can blow up in your face! New loans affect your credit and qualifications so be sure to consult your mortgage lender BEFORE you apply for a person loan. Your lender may also warn you about limiting credit card use during the mortgage process.

 

Here are the big benefits and drawbacks of moving loans.

Pros of a personal loan for moving expenses

  • You can borrow what you need for your move. Lenders can grant personal loans as small as $1,000 and up to $100,000 or higher, which is enough to fund nearly any move.
  • You’re likely to get lower rates. Personal loan rates typically beat rates offered on revolving credit options, such as credit cards and lines of credit.
  • You know when you’ll be out of debt. A personal loan has fixed monthly payments; or installments; designed for you to pay off the debt over your term.
  • You don’t need collateral for a personal loan. Secured loans such as a home equity loan might not be an option if you’re moving and planning to sell your home. You might need an unsecured personal loan instead.

Cons of a personal loan for moving expenses

  • You might not qualify for a personal loan. Unlike using savings or credit cards you already have, you must apply to get a personal loan. Lenders are unlikely to approve your application unless you have a decent credit score, income and debt-to-income (DTI) ratio.
  • You might pay some fees. Some (but not all) personal loans will charge origination fees to set up and fund your loan, adding to your borrowing costs.
  • You’re taking on more debt. Debt can be a big burden, so you’ll need to be sure you look at your payments and choose a loan you can afford to repay.

 

In all, using personal loans for moving expenses can be a decent idea if you can afford the debt and it doesn’t affect your new mortgage. Make sure you calculate personal loan payments and carefully decide if you can fit a moving loan payment into your budget.

So – make sure you are planning your next move with financial caution and you will have fewer regrets and less anxiety.