Unless you’re leaving a rental to move into ownership, you will have to manage the stress of coordinating your sale with your purchase.

Once in a while, everything lines up just right:  Your buyers will agree to move in on the day you move out, and the sellers of your new home will be gone when you get there.  Those are good days!

Often, though, getting three or more families to move simultaneously can be a challenge.

A popular solution is a bridge loan.

What is Bridge Financing?

The short answer is that bridge financing is a loan that allows you to take possession of a new home before the sale is finalized on your previous home.  It uses the equity in your current home as a downpayment, allowing you to carry both properties for a relatively short time.

Some buyers with a home to sell have been known to use a bridge loan for a day or two, while others take out this type of mortgage for a period of weeks or months, depending on circumstances.

Advantages to Bridge Financing

• Peace of mind.   Having the flexibility to offer the closing date required by the seller on the house you want can sometimes be the difference between an accepted offer and rejection.  Knowing that you can work with the bank to hold both properties temporarily unties your hands as a buyer.
• Time to prepare your new home.  Moving is hard, but renovating and cleaning after moving in is, arguably, even harder.  The gift of time to ‘feather your nest’ to your liking or to do necessary repairs – before your belongings (and your children!) are in the house – can be a real godsend.
• Leverage in negotiations on your own home.  If you don’t need to coordinate a perfect match between the closing dates of your current home and your new one, you may be in a better position when negotiating your own sale.  The two major items in any discussion are price and terms (including the closing date).

Disadvantages to Bridge Financing

• Added risk.  The vast majority of bridge loans accomplish their purpose to buy a little time between closings and everything goes off without a hitch.  However, there is always a small element of risk that something could go wrong with the sale of your current home.  This could create challenges.
• Additional costs.  Interest rates on bridge loans vary widely, but it’s safe to say they will be higher than traditional mortgage rates.  There will likely also be some legal fees incurred to register the bridge loan.

One Very Important Detail…

Even if you have lots of equity in your current home, there is one condition that is universal:  You must have a firm offer on your property before a lender will offer you a bridge loan.  You cannot arrange this type of financing before all conditions are removed from the buyer’s offer on your property.

In Summary

Although there is some risk associated with bridge financing, it is usually very minor and well worth it for the benefits it offers.  Your situation is unique, though, and you must figure out what the best decisions are for your circumstances.

As with most things, a professional can help you to assess your own finances to see if this option is right for you.  If you need a referral to an excellent mortgage broker, we would be happy to send you the list of who we trust.