Bridge Loans 101: What You Need to Know If You're Ready to Purchase before Your Current Home Sells
By Keith Loria
When it comes to successful real estate transactions, timing is everything. However, things don’t always go according to plan, and more often than not, home sellers find themselves in a tough spot. If you’re still in the process of trying to sell your current property, and your agent finds your dream home, what do you do? While you don’t want to lose the home to someone else, you also don’t have the money to carry two properties at once.
Luckily, if you find yourself in this situation, an option exists in a “bridge loan.” Also called gap financing, a swing loan or interim financing, a bridge loan basically bridges the gap between the time the new property is purchased and the old house sells.
“These are fantastic for borrowers who want to move prior to selling their old home because they can access the equity in their existing home for a down payment,” said Drew Smith, an analyst at a large mortgage company. “Interest on a bridge loan is calculated as simple interest and is paid up front for six months, relieving you from having to make two house payments until the home sells.”
Typically, a bridge loan is good for six months, but they can extend up to 12 months. One downside is that bridge loans normally carry an interest rate roughly two percent above the average fixed-rate mortgage. They also come with equally high closing costs.
For borrowers who can make both payments comfortably, the additional cost of paying for a refinance to create the bridge loan often outweighs the payment on a second mortgage for a few months.
“The bridge loan is a great option for borrowers who do not have the necessary income to make two payments at once, as long as there is enough equity in the current home to pay all the fees,” Smith says. “In addition, since the interest is paid for six months on the current home, this relieves the stress of having to make two payments.”
Those against bridge loans believe they are too risky in the current housing environment, since there are no guarantees the old property will sell within the allotted span of the bridge loan. Even if the property sells quickly, you need to be mindful of prepayment penalties.
Critics also suggest that instead of taking out a bridge loan, you might be better advised to borrow against a 401(k) or similar retirement plan.
Still, if that’s not an option and you believe that your home will sell, then a bridge loan allows you to act fast on a home you love and not have to worry about accepting any offer that comes along.
For more information about bridge loans, contact our office today.