If your family needs a bigger home, and you need to move before your current home is sold, you may feel a bit overwhelmed at the idea of making mortgage payments for two houses at the same time. Fortunately, some mortgage lenders provide a loan program for people in this type of situation. It's called a bridge loan. Here's what you need to know.
Bridge the gap with a bridge loan
A bridge loan is a loan that bridges the gap of time between when one property is sold and the next property is bought. Essentially, you'll be borrowing money using the collateral in your current home in order to be able to finance the next property you buy. The term length of a bridge loan is very short. It's not meant to take place of a regular mortgage.
Understand the various loan programs
Loan programs are how loans are structured. Bridge loans can be structured in several different ways. One way is to have the bridge loan structured to pay all liens on your current home and any overage is used for the down payment of your next home. With this option, you'll only make mortgage payments on your second home. You'll pay off the bridge loan when you sell your first house.
Alternatively, you can get a bridge loan as a secondary loan to use as a down payment on your next home. In this option, a portion of the equity in the first home will be used to finance the bridge loan. You will need to pay mortgages for both houses. However, if you are able to pull out a substantial amount of equity from your first home as a down payment for your second home, the mortgage for the second home will likely be reduced substantially.
Your risks of taking a bridge loan
There's always risks involved when you're dealing with finances. One risk is that the first home will not sell before the end of the term of the bridge loan. If that were to happen, you may get stuck with paying on the bridge loan as well as the mortgage(s).
There's also a risk of penalties if you sell the first home early and, therefore, want to pay off the bridge loan early. Before you move forward in your financial strategy, it's a good idea to study the local housing market closely to estimate how long your first house will be on the market before it is sold.
