Today’s article explains the equity way to close the financial gap between the new and the old homes’ mortgages.
A lot of people count on the money they are going to get from selling their current home to make a proper down payment on their new home and start a new mortgage. Unfortunately, many properties get stubborn at the point and refuse to sell while their owners are gradually getting frustrated at somebody else snatching the perfect home right from in front of their nose.
The frustration can be avoided in several ways, including financial aid from friends and relatives, or retirement accounts. If those fail, a bridge loan can certainly be of help.
A bridge loan is usually provided by the lender of the new home’s mortgage, but its collateral is the old home. Most bridge loans are short term high rate interest-only mortgages. The term is usually as short as 6 months; so if you are not sure that your current home will sell so soon, make sure there is an option in the contract allowing you to extend this period. Any lender will give you a hundred reasons to justify the high rate, but as it is an interest-only (if it is in your particular case) mortgage, the monthly payments do not add up to outrageous totals just because your current home is very likely to get sold well before the amounts involved go out of control.
A secured bridge loan makes it obligatory for you to sign your new home’s mortgage with that same lender, so always look first what the lender has to offer in the field of mortgages you are ultimately targeting on, because that latter one is the deal you’ll have to stick to for years. The conditions have to be favorable.
Bridge mortgages can vary in structure. Some pay off the first mortgage of the old home at the bridge loan’s closing and this amount adds to the sum you borrow to close on your new home. This total becomes the amount of your bridge loan and you pay interest on it until your old home sells and you receive cash to pay the loan off partially or completely. Thus, as you close on your new home, you will have two mortgages: a new first mortgage and the bridge mortgage.
The other way is just to add the new debt to the old one. This way you have three loans to attend to when you close on your new home: your old loan, your new first loan and the bridge loan.
Unsecured bridge loans are as rare as the circumstances which can suggest them. If your credit score is impeccable and you know for sure, i.e. have a binding contract of sale, that your old home will be sold at a certain date, you may try and find a bank that will write an unsecured bridge loan. As the lender is certain of the date and the amount of sale, he may be more willing to avoid putting a lien on that property. First and probably only choice is a bank, which you are already a client of, but even with them you may have to be quite insistent. Banks do not like short-term unsecured deals.
If your old home is not on the market yet, the choice of means is considerably wider. You can put the equity accumulated in your old property to work for you. You can start a HELOC, or a regular equity loan secured by the equity you have in your old home. The closing costs of these solutions are considerably lower than those of, say, a cash-out refinancing, but the rates are higher. A HELOC or some other high rate equity loan will come out overall cheaper if the “bridging” period is short. The longer the “bridging” period is expected to be, the more sense it makes to cash out by refinancing and pay a lower rate for as long as it takes for the house to sell. You can even rent the property out for some time to compensate for your expenses.
