Bridge Loans

If you are a current homeowner looking to buy a new home and sell your current residence, then you might consider a bridge loan. A bridge loan is particular to people who are already homeowners who need to use the equity from their current house towards the down payment on the new house, however, the closing dates on the two sales are mismatched for whatever reason.

The reason for the mismatch might be intentional, eg, you want to stay in your current home a little longer in order to complete renovations on the new home, or, the closing date on your current home just happens to be a bit later because of buyer preference or other outside issues.

Regardless, in order to qualify for a bridge loan, there are a couple important criteria that must be met:

  1. The equity in your current home must exceed or be equal to the amount of the loan
  2. You must have a signed contract from a buyer for your current home, with a firm closing date.  

A bridge loan is usually obtained from the same lender unwriting your current mortgage. The interest is based on the period of time between closing on your new home, and closing on your current home. The terms will specify that the full amount of the home is to be paid off as soon as the sale on your current home closes. 

When you apply for a bridge loan, you will be required to present paperwork indicating the firm, signed closing date for your old/current home, and your mortgage paperwork showing the amount of equity currently in your home. 

There are specific advantages and disadvantages to using a bridge loan.

Pros: Allows you flexibility around your closing date

Cons: Very high interest rates and admin costs make them relatively expensive

As always, whether or not a bridge loan is right for you really depends on your own financial situation and preferences regarding moving. A bridge loan is useful if flexibility on your moving date is a high priority for you, but others might find that the outcome isn’t worth the increased cost. And remember, a mortgage broker can help you evaluate the particulars of your situation to ensure that you are informed and successful when making your mortgage decisions.

Posted in