It’s hard enough to be a buyer in today’s real estate market if you’ve got money in the bank and a loan pre-approval. It’s nearly impossible if buying is contingent on the sale of your current home. What are your options if you can’t buy before you sell? Or if you are worried about being homeless if you don’t find a replacement home before escrow closes? You can always negotiate a lease-back giving you the opportunity to stay in your home after it sells, giving you more time to find your next home. But what if you don’t find it in that time frame? Is Airbnb your only option? If you find yourself worried about this situation, you may want to consider a bridge loan.
A bridge loan is a loan used to eliminate a cash crunch and “bridge the gap” while buying and selling a home at the same time. In the simplest terms, you borrow the difference between your current loan balance and up to 80% of your home’s value. The funds in this second mortgage are applied to the down payment for your next home. You keep your first mortgage in place until you sell your home and pay it off.
They may be a handy way to get yourself out of a jam, but that convenience comes at a cost. The interest rate will be higher on your bridge loan – ranging anywhere from the prime rate to the prime rate plus 2%, and in most cases, you’ll pay an origination fee on the loan, which could be as high as 1% of the loan. In addition, you’ll have closing costs on the bridge loan. You also have a shorter time to repay the loan. Bridge loans typically run for 6- or 12-month terms and are secured by your old home. Most lenders will also require you to agree to finance your new home with the same institution.
When you factor in the cost of moving into short term housing, storing your belongings, and then moving again, the increased costs associated with a bridge loan may well be worth it, not to mention the peace of mind knowing you have a place to live and more time to find your next home.
Bridge loans are complex, and it is important to get all your questions answered by an expert if you’re interested in this option. I am happy to refer you to an expert if you’d like more information.
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