If you’re a first-time homebuyer (or you already own a home), you’ve heard of mortgage loans. You have your conventional loans, FHA loans, VA loans, USDA loans and so on. But there’s another type of loan, not too many people are familiar with that can make the home buying process much easier. Yes, we’re talking about a bridge loan. Haven’t heard of them? To put it simply, a bridge loan “bridges the gap” between sales. Homebuyers use these temporary loans to finance their new home while waiting for their current home to sell. Get it?
How does it work?
Not every lender packages a bridge loan in the same way. When it comes to these loans, what’s important is whether or not they make sense for the individual’s specific goals and needs. However, there are two popular options lenders use with buyers.
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The first option, a lender provides funds that equal the difference between up to 80% of the buyer’s home value and their current loan balance. The second mortgage goes towards the down payment for the second home, while the first mortgage stays the same until the home sells and the mortgage is paid off.
The second option, buyers take out one loan for up to 80% of their home’s value. With that money, they pay off their first mortgage. The funds for the second mortgage are then applied to the down payment for the new home.
Like with any loan, there are positives and negatives. The main benefit of a bridge loan is that buyers can put in a “contingency-free offer” on a new home, without selling their existing one. This means buyers don’t have to wait to purchase their dream home until their old one sells. With that said, a bridge loan has higher interest rates and only lasts between six months to a year. And even if your home doesn’t sell during that time, you’ll have to pay back your loan. You also have to qualify for two homes and be able to afford two mortgage payments at once.
Should you apply?
There’s no denying a bridge loan can be convenient if you’re ready for a change but don’t want to risk a contingent offer. A bridge loan can also be a good way to finance a new house, in the event you have to relocate for a job. But, a bridge loan comes with a higher interest rate. In fact, most bridge loans are somewhere between 8.5% and 10.5%. Plus, paying two mortgages, and making payments on your bridge loan can be stressful – especially if your existing home doesn’t sell as fast as you’d hoped. We recommend talking to a local lender or mortgage broker for advice.
