Here to There: The Bridge Loan Strategy
Timing is everything when you’re buying and selling a home. But… what if it wasn’t?
When you want to purchase your next dream home, you search the market for days, weeks, even months to find the perfect place. And simultaneously, you prep your own home for sale, open it for viewings, and look for the right offer and buyer.
It’s great if the dates for your purchase and sale align and you want to move in exactly one day. But what if that isn’t the case?
Enter: the bridge loan. It’s literally a bridge between your current home and your future home! It fills the gap of financing when you can’t or don’t want to pay for two mortgages for an extended period of time.
Here are some reasons a bridge loan is a great solution for you:
- You want to take your time moving rather than do it all in one day
- Your new home purchase closes before your existing home sale
- You want to renovate before moving in
- You need time to clean or empty your existing home
- The housing market is hot and you don’t want to miss a perfect property
If you think there must be a catch – there are a few. Here’s what you need to know:
- Bridge loans are short term, temporary loans between 1-90 days
- You need a firm sale agreement on your existing home
- You will be required to make payments on both mortgages during the bridging period when you own both properties
- A realtor is required to process the transaction
- Cash will be required to pay realtor and legal fees, plus any mortgage penalties, outside of the bridge loan and mortgage financing
The pros: You’ll have plenty of flexibility in terms of closing and moving dates. It allows you to buy your dream home when you see it, rather than settle for what’s available in a specific time window. You also have flexibility in terms of your new home purchase, as you won’t need a full downpayment for a new home, instead using the equity you’ve already built up in your existing home.
The cons: You will pay interest on the new financing amount at a higher than your regular mortgage. Plus, you might incur fines for breaking your existing mortgage. You also need to have a lump sum of cash to pay for closing and sale costs. You might also have to use any existing financing sources first, like maxing your line of credit.
Bridge Loans for Land: Some lenders will also offer you the ability to use bridge financing for purchasing land. This works well if you don’t have construction financing secured yet, or you haven’t decided what to do with that land right away. There are more considerations than with an existing home, like borrower options, your net worth, the location of the site, etc.
How it works: You’ll need to use a lawyer and a realtor. When you complete your new home purchase, you’ll sign documentation that guarantees you will use the funds from your sale to pay off the bridge loan (you won’t get any cash out of the deal). Your lender may also require a collateral charge on the property you’re selling, depending on their conditions and the amount of the bridge loan.
Next steps: Want to calculate what it would cost, run your scenario for viability, or even apply for a bridge loan? Call or email me! It costs nothing to get my expertise on the financial aspects of your home purchase and financing plans!