Bridge Loans in Hawaii: How to Unlock Home Equity to Buy Before You Sell

Buying and selling a home simultaneously can be a real headache for many Hawaii homeowners. Managing overlapping timelines while trying to secure enough funds for a new place before selling your current one often leads to a lot of stress. The uncertainty of real estate transactions doesn’t help, with market fluctuations and possible delays adding to the pressure. Some worry that the only way they can tackle the situation is to sell, temporarily move out, and then move again after finding the perfect new home.

What if there was a smoother way to transition? Enter the bridge loan, a potential game-changer for your real estate strategy. A bridge loan is a short-term financing solution designed to bridge the gap, allowing you to purchase your new Hawaiian dream home before you’ve sold your current one. This could be the key to making your property puzzle pieces fit seamlessly together.

DISCLAIMER: This post is intended for educational purposes, not financial advice. If you need assistance navigating the use of a bridge loan in Hawaii, HomeLight encourages you to reach out to your own advisor.

What is a bridge loan, in simple words?

In real estate, a bridge loan can be a financial life raft that helps you navigate the waters between selling your current home and purchasing a new one. It’s a short-term loan that taps into your existing home’s equity, providing the necessary funds to make a down payment and handle closing costs on your new property. This type of loan is beneficial if you’ve found your dream home in Hawaii but haven’t yet sold your current residence.

While bridge loans are generally more expensive than traditional mortgages, they offer a swift and convenient solution, allowing you to purchase your new home without waiting for your old home to sell.

It’s worth noting that bridge loans go by various names, including bridge financing, bridging loans, interim financing, gap financing, and swing loans. Each term refers to the same financial tool designed to help you smoothly transition between homes.

How does a bridge loan work in Hawaii?

Imagine you’ve found the perfect new home in Hawaii, but your current home hasn’t sold yet. This is where a bridge loan comes into play. It allows you to use the equity from your existing home to cover the down payment and closing costs for your new Hawaiian abode.

The lender handling your mortgage for the new home will often manage your bridge loan. They usually require that your current home is actively listed for sale and will typically offer the bridge loan for a period ranging from six months to a year.

In assessing your application, the lender will consider your debt-to-income ratio (DTI). This calculation will include the mortgage payments on your existing home, the payments for the new home, and any interest-only payments on the bridge loan. However, if your current home is already under contract with a buyer who has secured loan approval, the lender might only consider the mortgage payment of your new home in the DTI calculation.

This consideration is crucial for lenders, as they need to be confident in your ability to manage payments on both properties should your current home take longer to sell than anticipated.

What are the benefits of a bridge loan in Hawaii?

In Hawaii, where the real estate market can be as dynamic as its landscapes, a bridge loan offers several advantages that make your home-buying experience smoother and more flexible.

Strengthen your bid: You can make a non-contingent offer on a new home and make your bid stand out in Hawaii’s competitive market.
Move only once: Avoid the hassle and cost of temporary housing by moving directly into your new home.
Prepare your old home for sale at leisure: You’ll have more time to make your previous home market-ready and increase its value.
Maximize deferred payments: Some lenders offer this feature, easing your financial burden.
Act quickly on new opportunities: Secure your new Hawaiian home without waiting for your current home to sell.

These benefits collectively make a bridge loan an appealing option for Hawaii buyers who need financial flexibility before they can sell their existing home. Ultimately, they can settle the bridge loan with the proceeds from their sale.

What are the drawbacks of a bridge loan?

While a bridge loan can be a strategic tool in your home-buying arsenal, especially in a market like Hawaii, it’s important to be aware of its potential drawbacks. These can impact your financial planning and decision-making process. These are some of the disadvantages of using a bridge loan:

Incur additional loan costs: Expect underwriting fees, origination fees, and other associated costs.
Face tougher financial burden: Juggling payments for two mortgages plus a bridge loan can be stressful.
Deal with stricter qualifying criteria: Getting a bridge loan might be more challenging than securing a traditional mortgage.
Navigate a potentially slow underwriting process: The approval timeline might not meet your expectations or needs.
Satisfy equity requirements: Your eligibility depends on the equity in your current home. Owing more than 80% of its value could be a disqualifier.

Understanding these challenges is crucial in determining whether a bridge loan is the right choice for your situation in Hawaii.

When is a bridge loan a good solution?

A bridge loan isn’t always the go-to solution for every home sale or purchase. Still, specific scenarios can significantly ease the transition from your old home to your new one, especially in a unique market like Hawaii.

Consider a bridge loan under these circumstances:

Equity needs: You need the equity from your current home for the down payment on a new one.
Affordability issue: Affording a double move and interim housing is challenging, or syncing the sale and purchase timelines is crucial.
Time sensitivity: Your ideal home appears on the market, and immediate action is necessary to avoid competitive delays.
Non-contingent offers: Your offers with a home sale contingency are consistently rejected, and you need more purchasing power.
Staging woes: You aim to sell an empty or staged home, which is often more appealing to buyers and potentially more profitable. This is particularly relevant if you cannot prepare or stage your current home for sale while still living in it, as an unoccupied home can be easier to renovate, maintain, and show to potential buyers.