Bridge Loans & Financing Options for Homeowners
Buying your Next Home before Selling...
What does a homeowner do when they want to close on a new home but their current home hasn't sold yet? Well, there are a number of financing arrangements that can help bridge the gap.
The odds of such a situation occurring is higher when the real estate market cools (because homes take longer to sell).
The most common interim financing tool for buyers is a a short-term bridge loan, which is a short-term loan secured by the equity in an as-yet-unsold house, with the funds to be used for a down payment and/or closing costs on a new house. There is no payment of principal until the house is sold or until the end of the loan term, whichever comes first. Interest payments may or may not be deferred until the house is sold. While it provides lots of flexibility, this type of loan usually carries high interest rates. Most lenders won't give you a bridge loan for the entire amount of the equity in your home. The amount of the bridge loan plus the remaining balance on your mortgage usually can't exceed 80 percent of the value of your home. And if you already have a second mortgage on your home, you may have difficulty finding a lender who will give you a bridge loan.
Another way to create bridge financing is to structure the financing on the new home with a combination of a first mortgage and a second mortgage. You'll keep the first mortgage on the new home for the long-term. You can pay the second mortgage off when your old home sells. The beauty of this approach is that most second mortgages have a long term; many are due in 15 years. So this relieves the anxiety of having to pay the loan off before you're ready. You will need to have at least enough cash to make a 10 percent down payment. Also, make sure that the second mortgage doesn't have a prepayment penalty.
Another popular approach is where Buyers who have a line of credit secured against the home they're selling use that to provide down payment funds. Some lenders, however, have restrictions against this.
Finally, in a soft market, the seller may be willing to do bridge financing for you.
And another less appealing possibility involves 100 percent financing on the new home mortgage. With no down payment needed, the buyer can manage until his old home is sold. However, the buyer must be approved to hold two mortgages.
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