A bridge loan is a short-term loan that’s used to make a down payment on a new home. If you need extra money to buy a new house before selling your current one and want to make an offer without it being contingent on your house selling first, a bridge loan can be helpful.
To find out if bridge loans are a good fit for your home-buying situation, learn about the pros and cons, costs associated with them, and how they operate.
It can be challenging to navigate the real estate market, particularly when it comes to financing. Although they have their own set of complications, bridge loans are a particular kind of loan that can assist you in purchasing a new house before selling your existing one. One of the most frequent queries regarding bridge loans is if they require simultaneous mortgage payments.
The answer is not always straightforward, as it depends on the specific terms of your bridge loan. However, in many cases, you will indeed be responsible for two mortgage payments while you have a bridge loan.
Let’s examine the situations in which you might be making two mortgage payments at the same time and delve deeper into the nuances of bridge loans.
Understanding Bridge Loans
A bridge loan is essentially a short-term loan that acts as a temporary financial bridge between selling your current home and purchasing a new one. It allows you to access the equity in your existing home to secure the down payment for your new home without having to wait for your current home to sell.
Compared to conventional mortgages, bridge loans often have higher interest rates and shorter repayment terms. Additionally, they are frequently backed by your present residence, so failing to make loan payments could result in the loss of that property.
Two Mortgage Scenarios with Bridge Loans
There are two main scenarios where you might end up paying two mortgages with a bridge loan:
1, First-Mortgage Bridge Loan:
- In this scenario, you take out a new first mortgage that replaces your existing mortgage. The loan amount is typically enough to cover the remaining balance on your current mortgage and provide you with additional funds for the down payment on your new home.
- This means that you will be responsible for making payments on both the bridge loan and your new mortgage until you sell your current home.
2, Second-Mortgage Bridge Loan:
- In this scenario, you take out a second mortgage in addition to your existing first mortgage. The second mortgage provides you with the funds for the down payment on your new home, but you still have to make payments on your first mortgage.
- This means that you will be making payments on three mortgages: your first mortgage, your second mortgage, and your new mortgage.
Factors Influencing Your Bridge Loan Scenario
Several factors can influence which bridge loan scenario is right for you:
- Your current home equity: The amount of equity you have in your current home will determine how much money you can borrow with a bridge loan.
- Your credit score: Your credit score will affect the interest rate you qualify for on a bridge loan.
- Your income: Your income will be used to determine whether you can afford to make payments on two mortgages.
- The terms of your bridge loan: The terms of your bridge loan will dictate whether you have to make payments on both your first and second mortgages or just your second mortgage.
Carefully Consider Your Options
Prior to obtaining a bridge loan, it is crucial to thoroughly weigh your options and comprehend the risks. Additionally, you ought to consult a financial advisor to make sure that a bridge loan is the best option for your circumstances.
Here are some additional things to keep in mind:
- Bridge loans can be expensive, so it is important to shop around for the best rates.
- Bridge loans can be risky if you cannot sell your home quickly.
- Bridge loans can be stressful, as you will be responsible for making multiple mortgage payments.
While bridge loans can be a helpful tool for buying a new home before selling your current one, they are not without their risks. It is important to understand the terms of your bridge loan and carefully consider your options before taking one out.
Consult a financial advisor if you’re thinking about taking out a bridge loan to make sure it’s the best decision for you.
You’ll typically be able to borrow up to 75% of your home’s value
The entire equity in your house will not be available to you if you take out a bridge loan for either a first- or second-mortgage. A bridge loan may not make sense if you don’t have more than 20% equity.
You’ll need to choose whether the loan is a first or second mortgage
One mortgage allows you to borrow more than you currently owe, and you can keep the difference. Alternatively, a second loan allows you to take out a smaller loan against some of the equity in your house.
Here’s how each works:
- First-mortgage bridge loan. A lender extends an offer to you for a single loan that covers the whole amount of your mortgage plus a down payment. After your present mortgage has been paid off, the bridge loan will take precedence until you sell your house, at which point you will settle the debt.
- Second-mortgage bridge loan. A lender offers you a loan for the amount required for a down payment on a new house, but they do not take over the balance of your existing first mortgage. Since your current house serves as security for the loan, it qualifies as a second mortgage.
What is a bridge loan – How do bridge loans work?
FAQ
Is a bridge loan separate from mortgage?
What is the debt-to-income ratio for a bridge loan?
Are bridge loans typically interest only?
Can a bridge loan be used as a second mortgage?
Some borrowers use the bridge loan as a second mortgage to put toward the down payment on their new home until they can sell their current home. Other borrowers take out one large loan to pay off the mortgage on their old home. Then, they put the remaining money borrowed toward the down payment on their new home.
How much money does a bridge loan pay off?
A bridge loan for 80% of the home’s value, or $240,000, pays off your current loan with $40,000 to spare. If the bridge loan closing costs and fees are $5,000, you’re left with $35,000 to put down on your new house. Let’s again say your current home value is $300,000. With $200,000 on the mortgage, you have $100,000 in equity.
Should you get a bridge mortgage?
A fix-and-flip home purchase. A bridge mortgage is worth considering if you’re fixing and flipping a home. If everything goes according to plan, you can repay the loan when renovations are complete. You may be able to obtain a bridge loan faster than traditional financing, allowing you to snap up a property quickly.
Can you pay off a bridge loan if a home sells?
If your home sells in a timely manner, you can use the proceeds to pay down your bridge loan. But if it takes a while to sell, you’re stuck paying off the bridge loan without that money. And if the home still hasn’t sold after the bridge loan term ends, you’ll have two mortgage payments. Your options are limited.