What Is a Home Exchange Loan and When Should I Get It?

If you only focus on stock images, buying a home is an enjoyable, albeit serene, experience filled with radiant, happy people finally living life to the fullest. If you’ve ever actually bought a house in your life, you know this is a lie: buying a house is stressful to the point of dreadful suffering . Outside of the outrageous expenses , every aspect of the home buying process is practically designed to create a sense of unhappiness.

One of the biggest concerns for home hunters is the unexpected situation of selling a home. That’s when you’ll have to sell your current location in order to afford a new home , which means you can purchase your dream home and make a deal; However, if you can’t sell your old house fast enough, the deal will fall apart and you’ll have to start the process all over again. What you may not know is that if you find yourself in this situation, there is a second option: a home exchange loan, also known as a bridging loan.

What is a home exchange or bridge loan?

When you sell a home to buy a new one, you are essentially using your own capital to buy a new property. A bridging loan simply allows you to take that share out of your home before you actually sell it – sort of like a very short-term second mortgage. You use the cash from the loan as the down payment (or full sale price) of the new home, fund the balance, and then use the proceeds from the sale of the old home to pay off the bridging loan.

There are several ways to do this:

• You can take out a loan against the assessed value of your home, pay off your existing mortgage, and use whatever is left as a down payment on a new home. So if your house is worth $350,000 and you owe $200,000 in mortgage, you borrow 80% of the value of the house ($280,000), pay off the mortgage and fees, and you’re left with something like $70-75,000. that can be used to buy a new home. house.
• You can take out a loan against your capital in an old house. In the example above, you have a net worth of $150,000, so you must borrow 80% of that amount ($120,000) in order to use it to build your new home. When you sell your old house, the proceeds will be used to pay off your old mortgage and bridging loan.

Either way, you will free up the cash currently in your own net worth, allowing you to buy a new home without having to include a contingency clause in the contract regarding the sale of your current home, giving you more flexibility and many options. less stress.

Pros and cons of a home loan

If you’re relying on the value of your current home to finance the purchase of a new home, the main benefit of a bridging loan is clear: you can relax a bit. If your old home doesn’t sell right away, you can still go ahead with building your new home without any contingency, which can give you an edge over competing buyers. You can also take your time moving because you managed to avoid the hassle of moving out of your old house. And you can calculate how much this relaxation will cost you: if you decide that you need three months to slowly move all your belongings from the old place to the new one, you know how much it will cost you in terms of paying off the bridging loan.

But bridging loans have a pretty big downside to consider: the cost. Most lenders will require you to have at least 20% equity in your current home to qualify for a bridging loan, and due to their short terms, these loans usually come with fairly high interest rates. In addition, “commissions” are often included as a percentage of the loan amount. Not to mention, you are essentially carrying an additional mortgage until you sell your old house. This means the extra time and stress reduction can come at a cost: if it takes a long time to sell your old home, the cost of maintaining that extra loan can go up.

Some lenders offer more sophisticated bridging loans that include additional services in the loan. For example, Knock ‘s Home Swap Loan program covers your old mortgage for up to six months, so you won’t feel the sting of double payments; Orchard ‘s Move First program will finance the refurbishment and refurbishment of your old home and then process it for you to get the best selling price. These costs are included in the bridging loan, so they are still worth considering, but these measures can further reduce your stress levels.