To buy a house ? Dave Ramsey says avoid this loan at all costs
This is advice to take.
- Buying a house before selling yours can be convenient if you can manage the expenses.
- A bridge loan could facilitate this, but it has some disadvantages.
- Bridge loans often have higher interest rates, and that can be a big expense to juggle if your home isn’t selling fast enough.
So you’re ready to buy a house – maybe a bigger property or move to a neighborhood with more restaurants and amenities. If you’re a current tenant, you may have spent the past few years building up funds to serve as a down payment on that new home. But if you’re a current homeowner, your down payment for a new home can be tied into your existing home.
It’s common for homeowners to accumulate equity in their home over time, allowing them to spend more on another home. So let’s say you bought your house for $300,000 and took out a mortgage for $240,000. But now your house is worth $400,000 and you only owe $200,000 on your home loan. This means that you are looking at a profit of $200,000 when you sell your home (minus realtor fees and transfer taxes, if they apply to you). And that profit can serve as a down payment for a new home.
But what if you find a new home to buy before your current home sells? This is a situation many buyers find themselves in, and a bridging loan may seem like a good solution. But financial expert Dave Ramsey warns that it’s important to proceed with caution when taking out a bridging loan, and that’s advice you might want to heed.
What is a bridging loan?
A bridge loan is a short-term loan that you can use in situations like the one above – you need to make a down payment on a house when your money is tied up until your existing house is sold.
Typically, you’ll need to pay off a bridge loan in six months or a year, and typically your existing home will be used as collateral for that loan. (Collateral is something of value that you can use to get a loan, like a house or a car. If you don’t pay your debt, the lender can take your collateral to get their money back.)
The advantage of getting a bridging loan
With a bridge loan, you get more options for buying a home without having to worry about selling your current home. This could relieve you of a lot of stress, especially in today’s real estate market where competition among buyers is fierce.
What homebuyers will often do is make an offer to purchase that is contingent on the sale of their existing home. But in today’s market, buyers with this kind of contingency could easily have their offers ignored in favor of offers without such a contingency. A bridge loan could make it possible to buy a new home without any charge.
The downside of getting a bridging loan
There’s a reason Ramsey is against bridging loans. First, they tend to come with high interest rates. And if you pay your loan late, the fees can be significant.
Now, in a normal housing market, a bridge loan can be riskier than it is today. This is because it is common for homes to sit on the market for months and you would likely need to sell your home to pay off your bridging loan.
But in today’s real estate market, where inventory is sorely lacking, the reality is that your home is less likely to sit on the market without a buyer, unless there’s something seriously wrong. not, or unless you have priced it unreasonably high. As such, you can argue that you’re less likely to repay a bridge loan overdue right now due to the state of the market – but it’s still important to recognize the risks involved.
Be careful when buying and selling
Buying a home before your current home is sold is a risky prospect that Ramsey advises against. And when you take out a bridge loan, that’s what you’re doing: going ahead with buying a home before you’ve sold your existing home.
If that’s a path you’re comfortable going down, a bridge loan could help present you as a stronger buyer. But be sure to take Ramsey’s warnings to heart before committing to this funding.
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