Bridge Loans: The Pros and the Cons
In this fast paced and high-priced market, it can be tricky to buy and sell a home at the same time. Many people don’t have enough extra dough lying around to afford a large down payment while still carrying a mortgage, feeding the family, and (let’s be honest) filling up at the pump! But if you have equity in your current home, you might qualify for what’s known as a bridge loan.
First things first: What is a bridge loan?
A bridge loan (aka gap financing or swing loan) is a short-term loan (12 months, give or take) that allows you to purchase a new home using the equity in your current home. Typically, you can borrow up to 80% of your home’s value.
A bridge loan can be either a first or second mortgage. As a first mortgage, you will acquire a loan to cover what you owe on your current home as well as your new down payment. If you choose to do the bridge loan as a second mortgage, your loan will only be for the amount needed for the down payment on your new home, secured by your current home.
Since this is a specialized loan, not all lenders will offer them, so be sure to check with your lender!
When is a bridge loan a good idea?
In a competitive market like the one we’re currently in, a bridge loan opens up doors for those who have a significant amount of money tied up in their home equity. It allows buyers to avoid a contingency offer, making their offer more appealing to the seller. If you’re purchasing a fixer upper, or you're planning to fix and flip, a bridge loan might be your best option as it’s often quicker to obtain than traditional loans and has different guidelines.
To qualify, lenders will look to see if you:
- Have at least 20% equity in your home.
- Have good credit.
- Have enough cash reserves or income to cover several mortgages in the event it takes longer than expected to sell your home.
When the housing market is down or slow, or if there is any reason to suspect that your house will not sell quickly, a bridge loan is probably not the best idea.
What are the Pros and Cons?
While this loan may sound appealing, it does come at a cost. Like any specialized loans, there are fees and risks involved. Here are some pros and cons to consider…
Pro: You have more time to sell your current home and can move more quickly on a home to purchase (no contingencies)!
Con: You’re paying a higher interest rate, closing costs and other potential fees.
Pro: Preserve your savings for a rainy day while still making a significant down payment!
Con: Risk of foreclosure if your home doesn’t sell quickly. Remember, a bridge loan uses your home as collateral, which allows the lender to foreclose if you aren’t able to repay the loan.
Pro: Avoid that awkward “in between houses” phase where you have to store your belongings and bunk with the in-laws!
Con: You’re less protected than you are with traditional loans. It’s important to note that if your home doesn’t sell, you will be responsible for repaying the bridge loan and your new mortgage!
There certainly is a lot to consider with this type of loan. It’s a risk, but it may be one worth taking if the circumstances fit the bill. If your interests are piqued, please reach out to one of our agents! They will share their expert advice on if a bridge loan is the right fit for you.
