For most people, one of the most difficult parts of buying a house is being able to time the sale of your old home with the purchase of the new one. The equity built in your existing home is usually used to cover a significant portion, if not all, of the down payment on your new purchase. Fortunately, banks created what is called a bridge loan to help make this portion of the homebuying experience easier. A bridge loan is designed to allow you to use your current equity to purchase a new home before you sell the current residence.
A bridge loan has the following features:
- Borrow against the equity in your current home. Typically, you can use the bridge loan to get your debt to value up to 90% of the value of your residence. For example, if the home you live in is valued at $300,000, you could carry debt on the home of up to $270,000. The bridge loan could be taken out for the 90% value ($270,000) less what you already owe on the home.
- Flexible repayment terms without monthly payments. Typically, bridge loans are available with terms ranging from six months to 18 months. The short life span of the loan can be a challenge if you are not able to sell your current home by the time your loan comes due.
- Loan payoff. The bridge loan may be paid and closed at the same time that you close on the home you are selling.
- Ability to make a large down payment. You can use the money obtained on a bridge loan to make a larger down payment on your new home. Depending on your new loan, this may result in a lower interest rate over the course of your loan.
- Fees. There are usually substantial fees associated with taking out a bridge loan.
- Interest rate. The interest rate is not as competitive as the rate on a standard mortgage and may range up to 15%, depending on your credit and the lender.
Locating a lender and applying for a bridge loan is easy. An Internet search engine can be used to search for "bridge loan lenders." Due to the high rates and variable terms of the loans, be sure to do some background research on the loan before agreeing to the terms. Accepting the first loan that you find may cost you hundreds or thousands of dollars during the life of the loan.
If you prefer to do business in person, contact your local bank or mortgage company to see what options they offer on bridge loans. A quick phone call can get you the information you need in regards to the application process, terms and rates offered.
Using a bridge loan is ideal if you are in a situation in which you need a large sum of money and you need it quickly. However, the high interest rate and initiation or closing fees make a bridge loan a slightly risky venture. As with all loans and financial decisions, be sure to review the specifics of your contract prior to closing the deal.