Bridge Loans: Your Guide to Using Them for Homebuying

If you’re considering purchasing a new house before selling your old one, a bridge loan could be the perfect solution for you. Let’s explore the world of bridge loans and determine whether they’re the best option for your house-buying journey. First, let’s define what a bridge loan is and how it operates.

What is a Bridge Loan?

Think of a bridge loan as a temporary financial bridge that helps you gap the time between selling your current home and buying a new one. It’s essentially a short-term loan secured by the equity in your current home, allowing you to access funds for a down payment on your new home even before your old one sells.

How Does a Bridge Loan Work?

Here’s a breakdown of how bridge loans operate:

1. Equity Check: You’ll need at least 20% equity in your current home to qualify for a bridge loan. This means the value of your home should be significantly higher than the remaining mortgage balance.

2, Loan Options: Bridge loans come in two flavors: first-mortgage and second-mortgage,

• First-mortgage bridge loan: This replaces your existing mortgage with a new one, providing you with cash back for your new home’s down payment.
• Second-mortgage bridge loan: This adds a second loan on top of your existing mortgage, giving you additional funds for your new home.

3. Repayment: Bridge loans typically have shorter repayment periods, usually within 12 months. You will be able to choose between interest-only, no payments until your home is sold, and fixed monthly payments.

4. Costs: Be prepared for closing costs of 1.5% to 3% of the loan amount and interest rates ranging from 6.99% to 8%, depending on your creditworthiness and loan amount.

5. Risks: Bridge loans come with certain risks. You’ll be responsible for two mortgage payments for a period, and if your home doesn’t sell within the timeframe, you might need to pay off the bridge loan with cash.

Should You Consider a Bridge Loan?

For those who need to move quickly and don’t want to miss out on their ideal home, bridge loans can be a useful tool. But before making the move, it’s imperative to carefully consider the advantages and disadvantages.

Pros:

• Access funds for a new home without selling your current one.
• Make a competitive offer without contingencies.
• Potentially avoid paying rent while waiting for your home to sell.

Cons:

• High interest rates and closing costs.
• Double mortgage payments for a period.
• Risk of losing both homes if you can’t repay the loan.

Bridge Loan Alternatives

Before committing to a bridge loan, explore other options:

• Home equity line of credit (HELOC): This acts like a credit card, allowing you to borrow against your home’s equity as needed.
• Home equity loan: This provides you with a lump sum of cash secured by your home’s equity.
• Cash-out refinance: This replaces your existing mortgage with a larger one, giving you access to additional funds.
• 80-10-10 piggyback loan: This involves taking two loans on your new home, allowing you to make a smaller down payment.

Do You Pay Bridge Loans Back Monthly?

The answer depends on the terms of your specific bridge loan. Some bridge loans require monthly payments, while others allow for interest-only payments or no payments until the sale of your home. Make sure to clarify the repayment terms with your lender before signing on the dotted line.

The Bottom Line

Bridge loans can be a helpful tool for homebuyers in specific situations. But before choosing, it’s imperative to comprehend the costs and risks involved. Carefully weigh your options and consider alternatives before taking the bridge loan leap. Remember, responsible financial planning is key to a successful homebuying journey.