What is a bridge loan?
A bridge loan is a temporary loan that helps “bridge” a gap for you. It can allow you to buy a new home before you sell your old one. You can borrow money based on the equity in your current home to use for the down payment on your new home. Then, when you sell your old home, you can use the money to pay off the bridge loan.
How does a bridge loan work?
A bridge loan works by providing short-term financing to help you buy a new home before you sell your current one. Here’s how one typically works:
- Application: You apply for a bridge loan with a lender, providing details about your current home, the new home you want to buy, and your financial situation.
- Approval: If approved, the lender will determine the loan amount based on the equity in your current home and other factors.
- Funds Disbursement: The lender provides you with the funds, which you can use for the down payment or purchase of your new home.
- Ownership of Both Homes: For a short period, you will own both homes. This allows you to move into the new home before selling the old one.
- Sale of Current Home: Once you sell your current home, you use the proceeds to pay off the bridge loan, including any interest and fees.
- Completion: With the bridge loan paid off, you now have a new mortgage on your new home, and the process is complete.
How can I utilize a bridge loan to purchase a new home before selling my current one?
It’s more straightforward than you might think. Let’s consider a scenario: you’ve found your dream home and wish to purchase it, but you still need to sell your current home to access your equity and eliminate the existing mortgage debt. In today’s seller’s market, it’s unlikely that the seller would wait for you to sell your current home. Enter the bridge loan. You can apply for a bridge loan from a lender based on the equity in your current home, the value of the new home, and your financial situation. If approved, the lender will provide you with a short-term loan to purchase your new home. Once you’ve closed on the new home and moved in, you can then list your old home for sale. After selling your old home and completing the closing process, you can use the proceeds to pay off the bridge loan and transition to permanent financing for your new home.
Would you ever use a bridge loan personally?
I’m glad you asked! I actually used a bridge loan to buy my last home. I found this amazing place in a great neighborhood, but I needed to sell my current home first. So, I called up my favorite mortgage banker, and she helped me secure a bridge loan. With that in hand, I was able to buy the new home, which needed a bit of fixing up. After sprucing it up, I moved in and put my old home on the market. The old home sold quickly and for a good price. I used the proceeds to pay off the bridge loan and get a permanent loan for the new home. Since I had a substantial down payment from the sale of my old home, I didn’t have to deal with PMI on the new mortgage. It all worked out perfectly! I didn’t have to deal with showing my old home while selling it, and I didn’t have to live in a construction zone while fixing up the new place.
Is a bridge loan the right tool for you?
Maybe. Everyone’s situation is different. The sure way to find out is to talk with us and discuss the pros and cons of getting a bridge loan to buy your new home. We have loads of practical experience helping clients just like you buy and sell homes. Give us a call soon and let’s talk.
