What Is a Bridge Financing?

Bridge financing, also known as an interim loan, is gaining in popularity. When a homebuyer plans to purchase a new home before selling an existing one, there are two common ways to obtain the necessary down payment: a bridge mortgage or a home equity mortgage (or Home Equity Line of Credit, HELOC).

Generally, a home equity loan is less expensive, but bridge financing offers more benefits for some borrowers. In addition, many lenders will not issue a home equity loan if the home is still on the market. We will help you compare the benefits between the two options to determine which is more suitable for your particular situation.

What is a Bridge Loan?

A bridge mortgage is a temporary loan that bridges the gap between the sale price of a new home and a homebuyer’s new mortgage.  If the current home has sold but the transaction does not complete before the closing on the new purchase a bridge loan is secured by the buyer’s existing home. The funds from the bridge loan are then used as a down payment on the new home.

Average Fees

Rates will vary among lenders. The following is an average estimate for a bridge loan. Interest rates fluctuate, but for this example, let’s use 8.5%. This type of bridge loan will carry no payments for four months; however, interest will accrue and be due when the loan is paid upon sale of the property. Here are some possible fees:

• Administration fee: $750
• Appraisal fee: $375
• Escrow fee: $350
• Title policy fee: $350+
• Notary fee: $40
• Recording fee: $65
• Wire/courier/drawing fee: $75

Home Buying Benefits of A Bridge Loan

• Bridge loans may not require monthly payments for a few months
• If the buyer has made a contingent offer to buy and the seller issues a Notice to Perform, the buyer can remove the contingency and still move forward with the purchase

Home Buying Drawbacks of A Bridge Loan

• Bridge loans cost more than home equity loans
• Buyers will be qualified by the lender to own two homes and many will not meet this requirement
• Making two mortgage payments, plus accruing interest on a bridge loan, could cause stress

There are circumstances when a homebuyer encounters difficulty in obtaining a mortgage or other funds on the closing date and they’re unable to close the transaction. When this happens, if you don’t have bridge financing in place, you won’t be able to close on your new home as the funds from the sale of your existing home are not available. This scenario can result in large costs including moving and storage fees, additional legal fees, financial penalties from the builder of a new home or vendor of a resale, cancellation fees for service contractors, not to mention the stress and anxiety that can occur because you’re not able to move in to your new home.

We understand that real estate transactions don’t always close simultaneously. In the event that interim or bridge financing becomes a necessity, we can often work with a lender to obtain proper financing for you. Call GLM Mortgage Group to set up a free consultation to learn more.