Bridge loans are short-term loans that bridge the gap between two different closing dates.
They are most commonly used when you sell your home and buy another home with a closing date of the purchase prior to the sale of your existing home. They are also becoming a popular way to take possession of that new home while it’s empty for two or three weeks to allow for renovations. You must have a firm sale on your current home to qualify for a bridge loan.
In the past, most home buyers would have their selling and buying dates match. It can be stressful as you have to pack your moving truck and unpack it all in less than a day.
Somehow everyone manages to get it done, but you think back on it as one of the most stressful days in your life. Buyers today have options and more are taking a relaxed approach as we see bridge loans gaining in popularity.
The process allows for a more relaxed move over a three to five day period, or in the case of a renovation perhaps as much as two or three weeks.
As an example, we’ll use a couple that sold their home for $400,000 with an existing mortgage of $200,000. The sale of the home is closing Dec. 5 and they have purchased another house for $500,000 with a new mortgage of $300,000, closing date Dec. 1.
The bridge loan will be for $200,000 which is the down payment/equity from the existing home.
The lender will disburse the new mortgage of $300,000 and the bridge financing amount of $200,000 (which is your equity amount in the property you have not yet sold) on Dec. 1 so you have the whole amount to complete your purchase.
At that time you will be responsible for the two mortgages since you have not yet sold your home.
On Dec. 5, you will receive the funds from the sale of your home and they will go directly to the lender through your notary/lawyer to pay out your existing mortgage and the bridge loan.
A bridge loan will only be offered by the mortgage provider for your new home. You will, as stated above, be required to confirm the unconditional sale of your existing home.
Some lenders will charge a fee (typically $350) plus the interest cost but there are lenders who waive the fee and charge the interest cost only.
The typical rate for bridge financing is prime plus five per cent which sounds high but based on the above the interest cost for a bridge loan of $200,000 for five days is under $220.
The maximum amount of the bridge loan will be the amount of your down payment that is coming from the sale of your home. It cannot be greater than the remaining equity in your home that you are selling.
The lender will also require your lawyer to provide an undertaking to register a mortgage if the sale of your existing home collapses (not a common occurrence but it can happen). Depending on your circumstance a bridge loan is an available option that can most certainly be utilized at a minimum cost.