Selling your current home and buying a new one can be very difficult timing wise, especially nowadays with bank delays and other factors sometimes pushing a closing date a day or more past the original date. One way to lessen that stress is to close on your new house a week or more before the closing date of the sale of your current house. But… you need the money from the sale as a down payment for the new house. That is where bridge financing comes in.
What is a bridge loan…
A bridge loan is a lending product most lenders have that allow you to bridge the gap between the purchase of your new home, and the sale of the old home. The amount of the loan is up to the amount of money that you will be using from the sale of your current home towards the down payment of your new home. For example, you sell your current home for $500,000, and you have a mortgage of $200,000. After you pay out the mortgage, you have $300,000 cash. This $300,000 is being used as the down payment of your new $800,000 home. The bridge loan amount available is $300,000 and this would cover the down payment on your new home while you await the sale of your current home.
Advantages of a bridge loan…
There are several advantages to the bridge loan. If the sale of your new home is delayed, that is OK as you don’t have to move out the same day, so you have some leeway. If your sale of your current home doesn’t close on time, it is OK, you have already purchased your new loan and are bridging the gap. No need to have the sale fund your purchase on the same day.
The other big advantage is you have some time to do some work on the new house before you must move in. Perhaps you want to paint some rooms or replace the flooring in the dining room. You have a few days to do this work without trying to live around all the boxes. I have done this a couple of times and it is a huge advantage. We also had a move where the vendors left the house fairly dirty, so we had some time to clean up the empty house before moving in (even though that was annoying!).
What does a bridge loan cost…
There is a cost to the bridge loan, but how much is peace of mind worth? Bridge loans are calculated on a daily basis, and usually a certain percentage above bank prime. For example, one bank charges an admin fee of $250 for the bridge loan, then daily interest based on 2% above their prime rate, calculated daily. As a simple calculation, on the same $300,000 bridge loan above: Current prime rate is 5.95%, plus two gives a rate of 7.95%. Interest on $300,000 for a year at 7.95% is $23,850. You divide that by 365 days, the daily interest amount would be $65.34. So, for one week, the bridge loan would cost you $250 admin fee, plus $65.34 X 7 days for a total of roughly $700. Many feel this is a reasonable fee to pay, for the added benefits.
Contact me…
Please contact me if you have any questions about bridge loans, and any other mortgage, refinancing questions. I would be happy to help.