For most homeowners, it’s unlikely that the first home you buy will be the home you stay in forever. At some point, you’ll want to sell and buy a new home. Most homeowners want to take equity from their current property and use it towards the purchase of their new home.

Unfortunately, it’s possible to get stuck in a situation where the closing date for the home you’re purchasing is before the closing date of the home you’re selling, leaving your down payment for the new home tied up in equity. This is where a bridge loan comes in.

What is a bridge loan?

A bridge loan is a short-term loan that’s separate from your mortgage. It “bridges” the gap between the closing dates of a home you’re purchasing and one you’re selling.

Because bridge loans are so common, all of the big banks offer bridge financing to their mortgage customers, typically up to $200,000 for up to 120 days. Some smaller lenders may not be able to offer you bridge financing, so it’s always a good idea to give us a call to discuss your options.

Advantages of bridge loans.

  1. The application process for receiving a bridge loan is usually much faster than it is with other types of loans.
  2. A bridge loan allows you to buy a new home even if the funds you need for a down payment are locked up in your current home’s equity.
  3. You can stay in your home without having to worry about financing a home purchase. If you can’t find the home you want, you can stay in your current home for as long as you need.
  4. If you can secure a bridge loan, you will be able to make a cash offer instead of being subject to sale. This makes your purchase offer that much stronger.
  5. If your credit score is low some bridge loan lenders will still offer you the loan. Since you are using your current home’s equity to back the loan, your risk to the lender considerably decreases.

Disadvantages of bridge loans.

  1. Bridge loans will usually have a higher interest rate than mortgage rates because of their short-term nature. You will also be making multiple loan payments each month, which may be a financial strain.
  2. Even though a bridge loan is much smaller than your mortgage and only lasts for a short time, lenders will charge relatively high transaction costs including origination fees, legal fees, and closing costs.
  3. If you are unable to sell your house, you will be stuck paying for two mortgages and a bridge loan. Failure to make payments will make your loan compound and you may have to pay additional fees. This creates pressure to sell your house to repay your loan.

To see if a bridge loan could be a good option for you, give us a call today!

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