Considering a new home purchase, let alone actually pulling the trigger so to speak, is a very stressful situation. Old mortgage, new mortgage, Bankers, Realtors, Lawyers, interest rates, down payments, etc. are more than enough fuel to make the most intelligent among us a little woozy. Within the actual process, timing is critical, as what one may consider a great deal does not come along frequently. That’s why it’s called shopping. What may work logistically, professionally, or aesthetically make not work financially, and vice versa.
For the reason of explanation, let’s examine the following hypothetical instance.
You notice a house that You have always admired has a for sale sign in the yard. After making a few telephone calls,you discover the house is reasonably priced and you would love to purchase it. The thought process tells you to sell the current house, buy the new house, and all is good. The problem is the new house will go quickly, probably well before you can sell your current house. However, you already have an existing mortgage, and current cash reserves are low for whatever reason, let’s say your kid’s college tuition. You need down payment for the new house, have to make the old mortgage until it sells, and are assuming a mortgage on the new house. Right about now depression starts to set in as reality just gave you a hard slap.
Being the creative, industrious soul that you are, you look into a home equity loan or line of credit on your existing home. After finding this is not an option either, it is now time to abandon all hope, right? Well, there is a chance….
A Bridge Loan may well be the answer to the dilemma. By definition, a Bridge Loan gaps the bridge between the time frame of selling the current house and buying the new home. The loan is attached to your current mortgage, and allows you to get down payment and in some cases fees for the new home and as such is not subject to credit checks. The duration of the loan may be as short as a few weeks up to several years, and my be open or closed ended. This is a viable solution if you are reasonably certain your old house will sell at a decent price in timely fashion. In many cases, there is a “grace period” where you will not have to make any payments on the Bridge Loan for a few months, thus possibly enabling you to sell your old house before a payment is even due. Sounds great if all the stars line up perfectly, if not, consider the following.
The drawbacks for utilizing a Bridge Loan are an issue. Loan origination fees, accruing interest, and in the worst case scenario two mortgage payments are cause for concern. Additionally a Lender will usually insist an applicant be qualified to carry two mortgages, and you may not qualify. Many financial institutions will not even consider a Bridge Loan for a number of reasons, including the risk involved in speculation. Interest rates for a Bridge Loan are higher than an equity line of credit. If the original house does not sell, you now face double property taxes, maintenance costs, and mortgages.
From a purely personal perspective, Bridge Loans are not for everyone. While they do serve an important purpose, they are, by nature purely speculative, and as such pose a threat of default. Even if a buyer is able to secure one, they are not for the faint of heart, or compulsive worriers.Many business have gone bankrupt attaining loans as expansion capital based upon unfettered optimism, only to succumb to reality. The best advice when pertaining to Bridge Loans is to evaluate the worst circumstance, and weigh if one could survive it financially.