We wrote recently about six types of mortgages, and we included the bridge loan in that round-up. Today, the Cushing Team at Guild Mortgage in Reno is back to discuss this unique kind of home loan in a little more depth.
The Bridge Loan
The name is fitting – a bridge loan is a short-term loan used to bridge the gap between a homeowner buying a new home before they sell their current home. These temporary loans are secured by the existing home and typically used as a down payment on the new home. By using a bridge loan, a buyer can use the equity of the existing house to buy the new one, without having to wait until the current home sells. Different lenders will have different guidelines, but generally, funding for this kind of loan is approached by asking whether it makes sense. In some cases, buyers will need to qualify for two payments, since they’ll have an existing mortgage on the current home as well as a new mortgage on the second. There are also rates and fees to consider. These also vary depending on the lender and the location.
The bridge loan is a popular option in some markets, but there are pros and cons that should be understood.
The Benefits of the Bridge Loan
The biggest benefit of the bridge loan is its immediacy. Instead of waiting for an existing home to sell, buyers can move quickly on a new home that’s come available at a great price in the right neighborhood. In some cases, bridge loans don’t require payments for a few months, and they give buyers the flexibility of paying when they have the cash. It also avoids the scenario of making an offer on contingency, which can make buyers more competitive in a seller’s market.
The Drawbacks of the Bridge Loan
On the downside, interest rates on these kinds of loans are often higher than those on home equity loans – often somewhere between .05 and 1.0 percent higher on a 30-year, fixed-rate mortgage. Still, there are often more benefits to a bridge loan than a home equity loan, so it’s something to be weighed. The stress of making two mortgage payments, plus the accrued interest of a bridge loan, can also weigh heavily, particularly if your old home sits on the market for any length of time.
Making the Call
If you don’t have the money for a down payment on a new home and your current house hasn’t sold, a bridge loan can be the key to funding the down. It’s important to have plans in place in case the existing home doesn’t sell, and you should be very clear on what a bridge loan will cost in terms of rates and fees. The Cushing Team here in Reno can answer all of your questions about bridge loans and make recommendations that apply to your unique situation. Contact us today, and let’s discuss your options.