What is a Bridge Loan?
If you’re researching bridge loans, the chances you’re a current homeowner, so we will skip the basics and get right into it! A bridge loan can be the perfect solution for folks that are looking for a little boost to help them over a common hurdle. They get their name from the purpose – bridging the potential gap between selling one home and buying a new one.
A bridge loan is typically designed to last 6 – 12 months. The interest rate on a bridge loan tends to be a few points higher than a typical 15 or 30 year mortgage, but because it is a very short term loan, the amount of interest paid tends to be a relatively small amount.
One of the most common uses is when a sale has not closed on a person’s current property, but they need down payment money to secure their new home. Other uses include:
- Convenience: A person may make a decision to buy before selling to avoid the inconvenience and upheaval of moving twice.
- Get the Mortgage You Want: By applying equity from your existing home to your new one, you may be able to reduce your new mortgage below the higher-rate “jumbo loan” level of $417K. Or, you may just want to minimize that new mortgage overall.
A bridge loan can be structured so that it pays off the existing mortgage plus an extra amount for the down payment on the new home, or it can be a third loan used solely for the down payment on the new property.
In the second case, it is important to be aware that in taking out a bridge loan, you will have three loans on your properties at one time; the mortgage for your current home, the bridge loan, and the mortgage on your future home. You probably won’t need to make payments on the bridge loan – that will be paid off in full when your current house sells. However, you WILL still be responsible for both mortgage payments each month. As such, before you being the process of applying for a bridge loan, you ought to ensure that you’ve got good enough credit and enough cash reserves to handle those payments without a problem. A good rule of thumb is that you should be able to carry the two mortgages comfortably for 12 months, in a worst case scenario.