If you only go by stock images, buying a house is a pleasant if not serene experience filled with shiny, happy people finally living life to the fullest. If you have actually bought a home some time in your life you know this is a lie: Buying a house is stressful to the point of abject misery. Aside from the incredible expense, every aspect of the home-buying process is almost engineered to produce unhappiness.
One of the biggest pain points for house hunters is the home-sale contingency. That’s when you have to sell your current place in order to afford your new home, which means you can land your dream home and enter into a contract; if you can’t sell your old house fast enough, however, the deal falls apart—and you have to start the process all over again. What you may not know is, there’s a second option if you find yourself in this situation: A home swap loan, also known as a bridge loan.
What is a home swap or bridge loan?
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When you sell a house in order to buy a new one, you’re essentially using your home equity to buy a new property. A bridge loan simply enables you to pull that equity out of your house before you actually sell it—sort of like a very short-term second mortgage. You use the cash from the loan as your down payment (or full sale price) on the new house, secure financing for the balance, and then use the receipts from selling the old house to pay off the bridge loan.
There are a few ways to approach this:
- You can borrow against your home’s appraised value, pay off your existing mortgage, and use whatever’s left over as a down payment on a new house. So if your house is worth $350,000 and you owe $200,000 on the mortgage, you borrow 80% of the home’s value ($280,000), pay off your mortgage and fees, and have something like $70-75,000 left to use towards the purchase of your new home.
- You can borrow against your equity in the old house. In the above example you have $150,000 in equity, so you’d borrow 80% of that ($120,000) to use toward your new home. When you sell the old house, the proceeds would go towards paying off your old mortgage and the bridge loan.
Either way, you free up cash currently trapped in your home equity, which allows you to buy a new house without having to put a contingency clause into the contract concerning the sale of your current home—thus giving you a lot of flexibility and a lot less stress.
Pros and cons of a home swap loan
If you’re relying on your current home’s value to fund a new house purchase, the main benefit of a bridge loan is obvious: You can relax a little. If your old home doesn’t sell right away, you can still move forward on the new house without a contingency, which can give you a leg up on competing buyers. You can also take your time moving, because you’ve avoided a rushed timeline for moving out of your old house. And you can calculate how much that relaxation will cost you—if you decide you need three months to slowly move all your stuff from the old place to the new place, you know how much that will run you in terms of paying that bridge loan.
But there’s a pretty big downside to a bridge loan to take into consideration: cost. Most lenders will require that you have at least 20% equity in your current home to qualify for a bridge loan, and due to their short terms, these loans usually come with pretty high interest rates. Plus, there are often “convenience fees” baked in as a percentage of the loan. Not to mention, you’re essentially carrying an extra mortgage until you do sell your old home. That means the extra time and lower stress can come at a steep price—if your old home takes a long time to sell, the carrying costs of that extra loan could add up.
Some lenders offer bridge loans that are a bit more sophisticated, rolling extra services into the loan. Knock’s Home Swap Loan program, for example, covers up to six months of your old mortgage so you don’t feel the sting of double payments; Orchard’s Move First program will fund home renovations and staging for your old home, then handle the listing for you in order to get the best selling price. These costs are rolled into the bridge loan, so it’s still a cost to consider, but these arrangements can lower your stress level even more.