What is Bridge Financing?
The smoothest way to sell your home and buy a new house is to sell first and buy second. By receiving all of the money for your current home, you’ll have all you need for the down payment on the new one.
But life doesn’t always go smoothly and it sometimes happens that you buy your next home before selling your existing one. Unless you have piles of cash sitting around, you might end up scrambling for the money for your down payment.
It’s also possible that you DO sell your home first, but that the closing period is longer than the closing time for your new home. This presents the same problem.
In either case, you need bridge financing. Bridge financing is exactly what it sounds like – financing to bridge the gap between buying your new home and selling your existing one.
Are Bridge Loans Expensive?
You might be pretty excited about the low interest rate for your mortgage, so don’t be surprised that your bridge loan will be substantially higher. Typically a bridge loan is about the same rate as a line of credit, a couple points above prime, which is high, but still not THAT high.
It’s important to remember that you’re only going to be carrying this loan for a couple of months until your home sells, and the interest charge will be pretty minimal.
There is also typically an administrative charge to set this up which will run you a few hundred dollars.
All in all it’s a great option to get you into your new home with as little stress as possible.
Is My Bridge Loan Secured?
Yes. Your loan is secured against your current home. For this reason you may be better off with a different financing option. Typically a home equity line of credit (HELOC), which is also secured against your home, carries a lower interest rate, and a regular line of credit would have about the same rate as a bridge loan without being secured to your property.
Setting Up A Bridge Loan
Not every financial institution offers bridge loans, so if you think you may need one, ask ahead of time. Your real estate agent can probably recommend a lender who will provide one.
As well, you’ll need a purchase agreement on your current home in order to be approved. This is not a loan “just in case” like a line of credit is. This is only for when the bank can see how long the proverbial bridge is and they know they’ll be getting their money back in a matter of weeks.
Advantages Of Bridge Loans
Without this type of financing, you’d be in a tough situation when trying to buy a home without selling your current one. Knowing that this financing is available means you can comfortably purchase the home you want without financing conditions. In a competitive market, this is a great advantage over anyone else who would need such conditions.
As always, speak with a professional to learn about every option you have to determine what’s best in your situation.