Buying a New Home Before Selling The Old: How to Finance the In-Between Stage

Toronto Real Estate News
Building Houses by Image Money
Building Houses by Images Money

Selling a home usually accompanies another difficult task — buying a new home. There are several ways to combine these two daunting tasks. One solution is buying a new home before selling your current home. But the economic side of this financially demanding option requires careful planning. Scott Bollinger is a licensed broker at Commonsense Network brokerage, part of the ComFree family in Alberta. He suggests,

It’s a lot to consider. Buy first and you won't have to shop around. But if you don’t sell your home quickly, you could end up losing money.

The risk is pretty high. No one dreams of doubling up on home-owning expenses, and not everyone can qualify for a second mortgage. Even if you're able to get a second mortgage, you should thoroughly review your monthly income and expenses to determine whether you can afford the added payments.

You should be prepared to pay for the costs of both homes for at least six to nine months. You should also make all the necessary repairs and improvements to the home you’re selling and find a real estate agent who’ll help you with selling it as quickly as possible.

Preferably, you should buy a home before selling yours in a sellers’ market with a high demand for homes and a good chance of selling your old home in a heartbeat. But you should be prepared for financing the in-between stage. Here are a few tips on how to afford buying a new home before selling your old home.

Bridge Loan

Between two houses by jjgod
  By carefully planning you can buy a new house, and spend the transition period in your old home.
Photo by Jiang Jiang

Bridge loans are temporary loans that fill the gap between the sales price of a new home and a new mortgage when the buyer’s home has not sold yet. They provide funds for a down payment on the new home while secured to the buyer’s existing home.

Costs for a bridge loan are usually between 2 to 5 per cent and include setup fees of approximately $250 to $700. Even though a bridge loan means additional expenses, it allows buyers to purchase the home they chose without worrying about missing the possession dates and therefore losing the purchase.

This comfortable solution of financing the in-between stage is gaining popularity in Canada, as it provides homebuyers freedom and flexibility. However, the costs can add up if you're unable to pay them off in a short period or if the sale of your old home goes awry. Equity is calculated by subtracting the debts you have on the home from the sale price.

The term of the bridge loan can be anywhere between one week and several months. According to statistics of the Canadian Association of Accredited Mortgage Professionals, homeowners borrowed $26 billion in additional equity from their homes in 2010 and 15 per cent of homeowners withdrew equity reaching an average of $30,000.

To obtain bridge financing, you need to provide documents verifying that the existing home settlements will occur. This includes the sale and purchase contracts. We therefore recommend you thoroughly review both documents before applying for a bridge loan. Steve Garganis, a mortgage broker from Toronto, pointed out,

Lenders will only offer a bridge loan equal to the down payment required for your new home. This amount cannot be greater than the equity remaining in your current home.

Home-Equity Line of Credit

HELOC by Wonderlane
HELOC is paid back like a credit card.
Photo by Wonderlane

A home-equity line of credit (HELOC) allows you to borrow sums at any time you need, totalling no more than the credit limit that you pay back like a credit card, with a minimum down payment. If you have your own home and owe less than 80 per cent of the value on your current mortgage, then you have access to additional funds.

A bank doesn't give you the money upfront. You receive a credit card and withdraw the money whenever you need, paying the interest only on the amount you’ve taken out. There are several factors that determine whether you qualify for a HELOC, such as your credit history, income, current debt, and other financial obligations.

The interest rates of HELOC mortgages are calculated daily at a variable rate, which fluctuates with the prime rate. This means that the amount you’ll have to pay each month will vary according to prevailing interest rates. HELOC is based on the market value of your home, so you should be aware that there's a huge risk if the value of your home decreases substantially. As Jeffrey Schwartz, executive director of Consolidated Credit Counselling Services of Canada, noted,

If the market changes, it affects how much equity you have in your house. And If you can’t make the required payments on your home equity loan, your home is at risk of foreclosure.

However, the interest rate for this option is lower than that of a private personal loan or a credit card loan and may even be tax-deductible. Furthermore, your lender may let you switch to a fixed-interest-rate or fixed-term-instalment loan.

Personal Loan

Loan by Stockmonkeys
Personal loans have higher interest rates.
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Another option for financing the in-between stage is getting a personal loan. It provides you a fixed amount of money for regular payments of principal and interest for a set period of time. Personal loans have higher interest rates, as they're not secured by the borrower’s property. The borrower can usually choose between a fixed or a variable interest rate for the term of the loan.

To get a personal loan, you have to show the lender your credit history so that he can determine your ability to handle the financial burden and adjust the interest rate. With a personal loan, you get your money relatively fast and don't need to pay any appraisal fees or legal fees. But be careful not to miss a payment or you can be charged.

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