What happens if you find your perfect home the day after you put your current home on the market? Like many people, you probably panic. Don’t worry! There is an answer – bridge financing.
What is Bridge Financing?
Bridge financing is short term financing that’s based on the equity you have in the home you are selling. The current home is used as collateral and the bridge loan is used to pay closing on the new home before the current home is sold.
Bridge Financing: a short-term, high interest loan that “bridges” the gap between the purchase of a new home and the sale of a current or existing home, allowing a seller to purchase a new property before selling an existing property.
Equity is determined by taking the sale price and deducting the debts you currently have on the home – the mortgage, secured line of credit (including prepayment penalties), real estate commissions, and legal fees. The net total is the basis for your bridge loan.
Usually, the interest rate for this type of loan is much higher (1 to 3% above prime), and there’s also sometimes an administration fee tacked on. Be sure to ask your lender, and they might waive the fee for you.
Some bridge loans are structured to completely pay off the existing mortgage at the bridge loan's closing, while other variations of the loan add the new debt to the old debt. Bridge loans usually come with six-month terms.