How Do Bridge Loans Work?
Buying a home and selling a home at the same time can present some financial challenges. Often the proceeds are needed from the sale of your current home to make a down payment on the new one. What happens if you find the perfect home and haven’t yet sold your existing home?
What is a Bridge Loan?
A bridge loan acts as a financial “bridge” between homes. It’s a short-term loan letting you buy a new house if you haven’t sold your old one yet.
Here is how a bridge loan works:
- The short-term loan allows you to use the equity (the value of your old home minus what you still owe on your mortgage) as a down payment on a new home, even if you haven’t sold the old house yet.
- Once your house sells, you’ll have access to the equity which will be used as the down payment in a refinance transaction converting the short-term bridge loan into a traditional fixed mortgage loan.
How Do Bridge Loans Help You?
Bridge loans have terms of six to twelve months and are best if you expect to quickly sell and buy your next home. Here are the many ways they help in a fast-paced market:
- They let you buy a new home, even with money tied up in the old one.
- Since the new home payments are deferred for six months, your monthly expenses won’t jump through the roof with carrying two house payments. You will continue to pay your mortgage on your old home as you’ve typically done.
- There are no pre-payment penalties.
- They prevent the stress of moving more than once within a short time period.
- This loan program allows a buyer to make a non-contingent offer thus strengthening your position as a serious buyer.
What Are the Potential Costs?
Like every loan, bridge loans have costs. They generally have higher interest rates than other loans. They also require you to have 20% equity. And because you’ll close two transactions (the purchase and the refinance), you’ll have more fees than in a typical single close purchase situation.
Always double-check your finances and prepare yourself for possible costs associated with a new loan.
If you’re good to go, you can confidently start your search when you apply for a First Bank bridge loan today!
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