Imagine living in a single family home for ten years, and comfortably paying off a sizable portion of the mortgage. But then, you take a new job and have to move quickly to a different state. You find a new home and would easily qualify for a mortgage, except you can’t make two house payments. What can you do?
For some homebuyers, the best choice is to take out a bridge loan.
What’s a Bridge Loan?
A bridge loan is a short-term home loan, typically for a period of 2 weeks to 12 months, that is taken out by a homeowner against their current property to finance the purchase of a new property. Thus, a bridge loan makes it easier for homebuyers to transition into a new home, until their old home sells.
Bridge loans can be structured to completely pay off the original property, or as a second loan on top of the original loan. Both options can offer different payment options, and one method may be better than the other, so consult your mortgage loan originator for the pros and cons associated with your specific circumstances.
Drawbacks of Bridge Loans
Though bridge loans can help homeowners transition from one home to another, they also have drawbacks.
First, bridge loans can be difficult to secure because of stringent qualifications. Lenders may require cross-collateralization of the homeowner’s assets, and require a lower loan-to-value (LTV) ratio in qualify, compared to a conventional mortgage.
Second, bridge loans are more expensive when compared to conventional mortgages, because of the lender’s added risk. Thus, bridge loans typically have a higher interest rate and higher fees.
When Might You Benefit from a Bridge Loan?
Bridge loans are not for everyone. Rather than taking out a bridge loan, some homeowners will wait until their first home sells to purchase a new home, others will relocate and live in temporary housing until their first home sells, and others will use a home equity line of credit for short-term financing.
In general, if you can wait until your home sells before buying a new home, you will be better off.
But if you are a qualified buyer and need to buy a new home before your original home sells, a bridge loan may be the best option for you.
Marimark Mortgage helps homeowners move up to new homes, providing them with a variety of options. We work with numerous lenders and specialize in conventional home mortgages, FHA, VA, USDA, refinance loans, and reverse mortgages.
When you are ready to start looking for a new home, please fill out our Quick Mortgage Application or contact us direct. You can be pre-qualified within minutes, and then start working on becoming pre-approved for a mortgage while shopping for your new home.