A bridge loan is a short-term financing option used to “bridge” the gap between the purchase of a new property and the sale of an existing one. Here’s a detailed breakdown of how it works and when it’s typically used:
What Is a Bridge Loan?
A bridge loan is a temporary loan that provides immediate funds to help a borrower purchase a new home before selling their current one. It’s commonly used in real estate, especially in competitive housing markets where timing is crucial.
- Term Length: Usually 6 to 12 months.
- Interest Rate: Typically, higher than conventional mortgages due to the short term and increased risk.
- Loan Amount: Based on the equity in the current home.
Example Scenario
Imagine you’re buying a new house but haven’t sold your current one yet. You want to make an offer without a contingency for selling your old home. A bridge loan gives you access to your current home’s equity, allowing you to make a down payment or even fully purchase the new home. Once your old home sells, you repay the bridge loan.
Current Home Value: $400,000
Remaining Mortgage on Current Home: $200,000
Equity in Current Home: $200,000
New Home Purchase Price: $500,000
Down Payment Needed (20%): $100,000
Jane is buying a new home for $500,000 but hasn’t sold her current home yet. She needs $100,000 for the down payment. Her current home has $200,000 in equity, but it’s not sold yet, so she can’t access that money directly.
Jane gets a bridge loan for $100,000 based on the equity in her current home. This allows her to:
- Use the $100,000 bridge loan as the down payment on her new home.
- Move into the new home before selling her old one.
- List and sell her current home afterward.
Pros and Cons
Pros:
- Enables purchase of a new home before selling the old one.
- Avoids contingent offers.
- Flexibility in timing.
Cons:
- Higher costs and interest rates.
- Risk if the existing home doesn’t sell quickly.
- Short repayment window.
Who Should Consider a Bridge Loan?
Bridge loans are best suited for:
- Homeowners with significant equity in their current property.
- Buyers in hot markets where homes sell quickly.
- Individuals who want to avoid moving twice or renting temporarily.
When used wisely, a bridge loan can help you seize new opportunities without being held back by timing constraints. Work with Core Bank today to get the bridge loan you need!
If you’re considering buying, refinancing, or upgrading your home, reach out to us to explore mortgage options that align with your financial goals.
