You can’t always get what you want, even when it comes to buying a home. Sometimes that desire will prompt you to climb up the property ladder.
Buying your first home might’ve been one milestone you’ve surpassed in your life, but purchasing your second might just be the next. However, before you settle on any home in particular, consider the reality of buying another new home: Is this an investment you’re ready to make?
Moreover, you might find yourself making a decision on the spot when finalizing an offer before you’ve actually sold your current home. To help you prepare for the process of buying a new home before selling the one you currently own, there are a few things you’ll want to consider in advance.
The pros and cons of buying a home first
On one hand, your rationality tells you that it’s safer to sell a home first before entering a legal agreement to buy a new one. Yet the reality is that you sometimes can’t help but fall in love with a dream home.
However, that new home might come at a hefty price. When buying before selling, you risk owning two properties until you can find a buyer. That means you’ll face the possibility of paying two mortgages at the same time. This costly situation can quickly turn into a worst-case scenario. There’s also the pressure of finding a buyer as soon as possible. Ultimately, this can provoke you into selling your home at a price significantly less than what you were originally expecting. To prepare for this instance, you can use our mortgage affordability calculator to gauge how much you can realistically afford based on more specific personal factors such as income and spending habits.
If you’re lucky, you’ll get a great offer for your current home and sell it quickly. However, the chance of that happening is dependent on a number of factors, such as the home’s location and market conditions.
But if you’re planning on moving anyway, buying a home first before selling your current home can be less stressful because you might not feel as pressured to find a home right away. Whereas in the case of selling first, you may be tempted to buy any home before the closing date so you don’t need to rent a place in the meantime. One of the last things you’ll want to do is settle for just anything when it comes to buying a home.
Financing the decision to buy first
If you’re planning on taking out a separate mortgage on your new home, our mortgage payment calculator can paint a picture of what you can afford, independently of selling your current home. As long as you can make the minimum down payment required for your new property and you meet the qualification criteria for the mortgage, the process of taking out your second mortgage should be similar to that of your first.
Another tool that might help you finance your second home is bridge financing. Bridge loans are loans that use your current home’s equity towards the down payment for your new property. Usually, bridge loan providers are willing to lend out a maximum of $200,000 for up to 120 days. If you end up needing a larger loan or more time to pay it back, the lender will make a decision on a case-by-case basis.
In order to qualify for a bridge loan from a traditional lender, you’ll need to present a copy of your sale agreement from your first home. You’ll also need your new home’s purchase agreement. If you haven’t determined the exact selling date yet, you might need to see a private lender instead.
Calculating your bridge loan
The total amount you’ll need to take out with a bridge loan is equal to:
Purchase price of the new house – value of mortgage – initial deposit = bridge loan
For example, let’s assume that the new home you want to purchase is priced at $500,000 and you’ll be making a 5% deposit ($500,000 x 0.05 = $25,000). Let’s also say you can put down $150,000 in equity that you had appraised from your existing home. Since the closing date of your purchase is before the closing date of your sale, you’ll need to bridge the difference between those amounts. For this specific example, the calculation would be the following:
$150,000 (down payment) – $25,000 (deposit) = $125,000 (bridge financing)
Like all other mortgages and loans, your bridge loan will require you to pay interest. From the perspective of the lender, bridge loans are riskier than regular mortgages since there’s the chance of the sale of your home falling through. As a result, you’ll have to pay a higher interest rate than you would on a regular mortgage—generally prime + 2% or prime + 3%. Moreover, you’ll incur some administrative fees as well. That being said, this is a short-term loan and you can repay it once you sell your current home.
The bottom line
Buying a new home before selling your current one doesn’t have to be stressful because you have options. Bridge financing gives you additional time to find your dream home without being forced to settle for a home you don’t love.
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Flickr: Robert Jack Will