Buying your second home is nothing like buying your first. This time around, you have the experience of being a homeowner.
You know what to expect throughout the process, and now you’re probably counting on proceeds from the sale of your first home to help cover the down payment and the closing costs of your new home.
What happens if selling that home is taking a bit longer than you anticipated?
- What if you need to move immediately because of a job opportunity?
- What do you do when you find your dream home that will be snatched up if you don’t grab it quickly?
How are you going to come up with the funds if your home isn’t selling quickly?
This is where a bridge loan might be your answer. Bridge loans are most commonly used to help the borrower span the gap between the sale of one home and the purchase of another.
A bridge loan provides temporary financing until more permanent financing can be obtained.
When taking out a bridge loan, it’s understood that once permanent financing is in place, some of those funds will be used to pay back the bridge loan. Bridge loans, regardless of type, usually come with due-and-payable dates set by the lender. If your home hasn't sold after that time, you'll generally have to ask for an extension. Many lenders also add a due-and-payable-upon-sale clause. This means that the loan must be paid when your old home is legally sold and closed, regardless of any previous term stipulations.
The structures of most bridge loans vary however, typically borrowers structure their loans to pay off all the existing liens on a property once your existing home is sold. Payoff options, terms and costs vary, so take the time to understand the features of the loan you are considering.
Bridge loans have shorter terms than other mortgages, and are typically more expensive as well. Also, a lender will usually only extend a bridge loan if the borrower agrees to finance their new home’s mortgage through the same institution.
Bridge loans seem to provide the ideal solution to a less-than-ideal situation: You can now house-hunt freely and without waiting for your current home to sell. However, bridge loans are not as simple as they may seem.
Let’s take a look at some of the pros and cons of taking out a bridge loan.
1. Freedom to house-hunt
The most obvious benefit of taking out a bridge loan is also the most significant. With this financing in place, you’ll be free to buy the home of your choice, without being bound by the sale of your previous home.
2. Short lending term
Another big benefit of bridge loans is their short lifespan. Bridge loans usually run for six-month terms, though they can span anywhere from several weeks to several years. These terms are in contrast to most conventional loans. The conventional loans are structured around a long payback term that can last for decades. The longer the payback term, the more time there is that the borrower could suffer a financial setback, which could make repayment challenging or impossible.
The short payback term of bridge loans assures that this loan will not be a source of financial stress for years to come.
1. Total debt increases
Any loan you take out will cause your total debt to climb. Sometimes, a bridge loan will split the purchase of the second home into two mortgages, leaving you with three monthly mortgage payments; one payment from your previous home that you are still trying to sell and two payments on the new house -- one for the new mortgage and the third payment on the bridge loan. The extra payment and increased monthly financial obligations could be a strain on your budget.
2. High-interest rates and fees
To compensate for their short lifespans and the amount of work the lender has to do for them, bridge loans generally have higher interest rates than a basic loan. There are also various fees involved, such as closing costs, origination fees and more that will cost you additional money.
3. Risky contingency
Bridge loans are usually taken out with the understanding that the sale of your existing home will allow you to repay the loan. But what if your house doesn’t sell before the loan is due? This can happen even if you have an interested buyer. They may not get the financing they need, or they may back out. Then you will be left with a huge debt on your hands that you can’t afford to repay.
Even if you think you have a good buyer, it’s important to speak to a Realtor about market conditions before taking out a bridge loan Make sure the odds are in your favor and that it is likely your home will be sold on time before committing to a loan that is contingent on its sale.
If you need the funds from the sale of your home before the transaction is finalized, but the thought of taking out a bridge loan makes you uneasy, there may be other options. Taking out a Home Equity loan on the old home, borrowing against a 401(k) plan, or taking out a personal loan may be a more comfortable option for you.
To look at all the options for bridging the gap between selling and purchasing a home call 248-322-9800 x 3265 or stop by a Genisys Credit Union branch for guidance throughout the entire buying and selling process.
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