Often the competition for houses can be fierce, especially in a “seller’s market”. Many sellers will reject any offer they receive that has a contingency clause (for example, a clause that states the offer is contingent on the buyer selling their own house). This can be problematic for the buyer who does indeed have a house to sell.
To stay competitive in a tight market, some buyers make the choice of securing a bridge loan (also known as a swing loan or bridge financing). A bridge loan is a temporary loan that “bridges” the gap between the sales price of a new home and the buyer’s new mortgage, for the time period between when the buyer closes on their new home and the time in which their old house sells. The funds from the bridge loan are then used as a down payment on the buyer’s new home.
A bridge loan is typically for a term of one year or less, and is due upon the closing of the sale of the buyer’s house securing the loan or one year, whichever occurs first. The bridge loan pays off the buyer’s first house with the remaining funds, minus closing costs and six month’s of interest, going toward the down payment for the new house. If after six months the “old” house has not sold, the buyer will begin making interest-only payments on the bridge loan. When the “old” house sells, the bridge loan is paid-off. If the “old” house sells within the first six months, any unearned interest payments will be credited to the buyer. In some cases a buyer may qualify for a bridge loan that simply adds the cost of their new house to their current debt.
The interest rate for bridge loans, and the fees to make the loan, vary from lender to lender. Fees can include an administration fee, appraisal fee, escrow fee, title fee, and loan origination fee. The advantage of a bridge loan is that it allows you to make a competitive offer on a house without a contingency clause. The disadvantage of a bridge loan is that it is usually a short-term loan (1 year or less) with high interest rates and fees.
With our knowledge of local market conditions, We can help you determine whether a bridge loan is your best option for making a competitive offer. An alternative to bridge loan financing might be a home equity loan.
Home Equity Loan
A home equity loan allows you to borrow money using your home’s equity as collateral. It is a secured loan, second in line to the buyer’s first mortgage. Equity is the difference between how much the buyer’s home is worth and how much is still owed on the mortgage. There are two types of home equity loans: closed end and open end, also called a home-equity line of credit, and both loans are secured, second mortgages. The line of credit home equity loan is a revolving line of credit, where the borrower can choose how much and how often to borrow, and the lender can change the interest rate over time, usually based on some financial index. A home equity loan usually has a fixed interest rate, is for a fixed amount, over a fixed period of time. Typically the interest rate is based on the prime rate plus a margin.
A home equity loan can be a much less expensive alternative to a bridge loan, if the buyer has enough equity in their home. A home equity loan requires far less fees to make the loan, and the interest rate is usually less than the interest rate on a bridge loan.