Congratulations! You’ve found your dream home! There is a problem, though: the owner of your dream home has to close the deal within a month, and you can’t sell your current property that quickly. Enter bridge financing, your best way to seal the deal. This type of financing is a hefty short-term loan that serves as a link between the periods when you own and are paying for two homes.
Present your lender (the same lender you used to secure the mortgage on your current home) with two firm offers, one for your current house and one for your next home. You should be able to obtain financing of 80–90% of the value of the equity in your current home in the form of a bridge mortgage. Use this new mortgage to finance the purchase of your new home, and carry the two mortgages during the overlap period before the sale of your current home closes.
After your home closes, use the proceeds of the sale to pay off the bridge loan, including interest and costs. You also have the option to repay the bridge loan in 6 months to a year. This is a good idea if you need to save a bit to pay off the bridge in its entirety.
The trouble with bridge financing is that it can really add up.
- Interest on this type of short-term loan is comparatively high, typically the prime rate plus 1-3%.
- There’s a strong possibility you will be required to pay up to 6 months worth of interest in advance for bridge loans that allow you a year or more for repayment.
- It may be necessary to set up and pay for new mortgages on your old home and your new one, and on top of that, use both homes as collateral against the debt.
- Should the deal for your new home fall apart at the last minute, the bank could seize your home if it was used as collateral for the bridge loan. (This is obviously a worst-case scenario but you have to be prepared for everything.)
Before considering a bridge loan, assess your situation, because sometimes paying the extra costs can mean the difference between purchasing the home of your dreams and missing out entirely. When you’re looking for a new property, one will stand out above all others. If you can’t sell your existing property soon enough, you run the risk of losing out to buyers in an improved financial situation, and in this case, a bridge loan makes perfect sense.
