Bridge Loans
Recently, a client came to me asking about getting a Bridge Loan. He and his wife had been shopping for a new home and just signed a contract for a thirty day close. The problem was that the contract was contingent on them selling their current home, first. With the real estate market as slow as it is, a quick sell of their current home seemed unlikely.
One solution is the Bridge Loan. With a bridge loan, the buyer can access the equity in their current home and use it to put down on the home they wish to buy. Here’s how it works: Let’s say that the current home is worth $300K and the borrowers owe $150K. Let’s say that the borrower’s wish to use $100K of their equity to put down on their new home. The bridge loan amount would be $250K to pay off the old loan and provide the new down payment. The bridge loan offers the borrower a year to sell their house, and the best part is that they don’t have to make payments on the new bridge loan in that time.
So what’s the down side? Bridge loans are short term loans, and the bank has to make a profit. The interest rates on these loans are usually about two percentage points higher than the normal 30 year fixed rate. They are also high cost loans. Because the bank will not be holding the note long enough to really make a profit, they usually charge Discount Points on the front of the loan as a way of making you prepay the interest that they won’t be making if you sell your home in one month instead of twelve.
A different solution would be to get a Home Equity Line of Credit on the current home. HELOCS are very low cost loans and their payments are interest-only. They allow the borrower to access the equity in their current home on a as needed basis. But, with this type of loan, the borrower will have to be able to make the payments on both houses until the current home is sold.
This is a great book to get because it explains all of the different mortgage loan programs
