Understanding Bridge Financing For a Home Loan Purchase

Allison Beatty
LoanBiz Columnist

Article Rating , 5 out of 5 based on 1 votes

You've found the home of your dreams. The only problem is that you still have to sell your existing home. Many home owners face this dilemma, juggling their desire to move to a new home with the reality of having to first sell their home. Fortunately, bridge financing can help.

Bridge Loans Literally Bridge the Gap

A bridge loan is designed to get you through a temporary mortgage transition period. Depending on your local real estate market, it often is advantageous to buy a home before selling the one you live in. Some of the situations in which bridge financing might make sense include:
  • When the new home needs remodeling. This way you can work on the home without living through the dust and disruption.
  • When homes sell fast in a coveted neighborhood. If you have your heart set on a particular neighborhood, then you may have to jump fast to buy a home.

Using Home Equity as Bridge Loan

If you have considerable equity in your home, one solution is to take out or use an existing home equity line of credit. This may not provide enough financing, however.

New Mortgage Plus Bridge Loan

Another solution is to take out a new mortgage for the new home, plus a bridge loan that helps with the down payment and other expenses. The advantage of this option is that once you sell the home, you can use your equity from that home to pay off the bridge loan.

Bridge loans do carry additional expenses, however. The interest rate on this type of financing often is one to three percentage points higher than traditional loans.

Bridge financing can be a valuable mortgage tool, but one that should be researched carefully. Look at your income stream and your ability to make the loan payments. Also, make sure your home is in tip-top condition and well-positioned to sell.

About the Author
Allison E. Beatty is a syndicated real estate writer who has been writing home improvement columns for 15 years.

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