How Bridge Financing Works
🕛 3 minute read
A bridge loan is a short-term financing solution designed to support homeowners during the transitional period between selling their current property and purchasing a new one.
It allows you to utilize the equity from your existing home as a down payment for the next property, providing a seamless financial bridge until the sale of your current home is finalized.
Buying a new home often comes with the desire to take possession before moving out of the old one, allowing time for renovations and adjustments. However, this can be challenging as most people rely on the proceeds from selling their old home to fund the down payment for the new one. Bridge financing steps in to address this situation.
What are bridge loans?
Bridge loans are short-term financing solutions that typically span from a few weeks to a few months. They become necessary when the closing date for the home you’ve sold is after the closing date for the new property you’ve purchased. This type of financing enables you to access the equity from your existing property to contribute to the purchase of your new home.
To qualify for a bridge loan, you must have firm sale and purchase agreements in place for both properties.
The lender needs assurance that you won’t indefinitely bear the costs of your existing home, so they exclude these expenses from your mortgage application.
Reasons to consider selling your existing home before purchasing a new one:
- Property values fluctuate, making it uncertain how much equity will be available until your home sells.
- Proceeds from the sale may be needed for down payment, renovations, closing, and moving expenses.
Costs of bridge financing:
Bridge financing generally incurs higher costs than traditional mortgages, with an interest rate based on the lender’s Prime rate plus an adjustment factor of up to 5 percent, and it may include an administration fee. Depending on the loan size and duration, the lender may register a lien on the existing property until the loan is repaid, involving additional expenses for a real estate lawyer.
Considerations if bridge financing is not available:
If bridge financing isn’t accessible, alternative sources like private loans may be considered. However, these often come with higher interest rates, ranging from 7-15 percent, and additional up-front lender and brokerage fees, dependent on factors such as loan amount, loan-to-value ratio, credit bureau, and property location.
Navigating bridge financing and property transactions can be complex, but you don’t have to figure it out alone. Reach out, and I can help you determine the best option for your situation. Let’s ensure a smooth and successful property transition together!
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