Selling one home and using the proceeds to fund the purchase of another is not uncommon. But what if your new home purchase is closing before the old one\’s being sold off?
You will definitely need a short-term financing solution to aid your purchase. Here\’s where bridge financing comes in.
Bridge financing gives you access to a short-term loan against the equity of the home you are selling. Once the sale of your home is complete, this loan gets paid. The home\’s equity is calculated by deducting the costs of paying off current secured credit lines and/or mortgages, legal fees and commissions, from its sale price. You can get a bridge loan from the lender/bank that is providing you with the mortgage for your new home.
The interest rates on bridge loans are typically one to three percentage points higher than bank\’s prime lending rates.
If you are buying and selling on the same day, it is best to have a bridge or some sort of interim financing in place. This is especially true if the buyer:
- has put down a small deposit
- is buying a home for the first time
- requires a first and second mortgage
At a time when there is a rush of young first-time buyers, there is a greater likelihood of them taking a longer time to meet mortgage conditions. So it is advisable that you have some funding solution that you can turn to when you plan to buy and sell your home simultaneously.