Bridge Loans 101
How to finance a new home when you have a house to sell.
What happens when you want to buy a house in a hot market, but you still have a house to sell? In today’s market, an offer contingent on a buyer selling their house will get passed over in favor of one with no financing contingency. One tool buyers can use in this situation is a Bridge Loan.
What’s a bridge loan?
A bridge loan is a home loan designed for people who have an existing home and want to buy a new one. It bridges the gap between selling a house and purchasing a new one. Loan terms are usually between six and 12 months.
Bridge loans can be used in one of two ways. With this loan, you are using the home equity as a down payment on your next home, or to pay off the original mortgage on your existing home.
How do bridge loans work?
To understand how bridge loans work, let’s look at a hypothetical West Michigan couple, Zac and Madison. Their family is growing and they need a bigger place, especially since Madison started working from home full-time.
They can borrow up to 85% of the home’s value. Zac and Madison’s current house has a State Equalized Value (SEV) of $200,000. The full value of their home is two times the SEV, or $400,000, and they owe $200,000 on the original mortgage.
For Zac and Madison, the summary looks like this:
$400,000 | home value
$340,000 | 85% of home value
$200,000 | original mortgage
$140,000 | home equity value
If our couple wants to use a bridge loan to put toward their new house, they can borrow up to $140,000 to put toward their new house. If Zac and Madison choose to pay off their existing mortgage, they can borrow up to $340,000.
How do bridge loans get paid off?
Bridge loans frequently only require monthly interest payments. Some lenders don’t require a monthly payment, but their fees and/or interest rates may be higher.
The bridge loan is fully paid off when the sale of the borrowers’ first home is complete.
The terms of a Consumers Bridge Loan allow up to 10 years for repayment. Interest rates are based on the Wallstreet Journal Prime Rate, which is variable.
Are there any drawbacks to a bridge loan?
While bridge loans often carry higher interest rates than long-term home loans, they are designed to be used for a short time.
Another thing borrowers should consider is that if their first home doesn’t sell by the end of the loan’s term, they’ll have multiple house payments until they can sell their home.
Bridge loans have become a popular solution to navigating the current housing market, but the intensive turnaround time required for the short-term loan makes it unique in that many lenders, including Consumers, charge a fee. The Consumers Bridge Loan carries a 0.5% fee or a minimum of $850.
Who uses bridge loans?
Bridge loans are typically used by people with stable finances and good credit who are moving up to a bigger home because of a growing family or changing needs. Most expect their existing home to sell within 30 to 60 days.
People who want more purchasing power will use a bridge loan that pays off their current mortgage and taps into their home equity because it keeps their debt ratio lower. This financial move helps them qualify for a higher priced home.
Consumers Mortgage Loan Officer Gregg Teegardin, NMLS #130665, says that in today’s housing market, many people who apply for bridge loans don’t end up using them because their houses sell so quickly.
“It’s a back-up plan for buyers,” he says. “If they sell and cancel before the bridge loan goes into effect, they only pay for the appraisal fee and a $300 early termination fee.”
Consumers helps more than 2,000 members finance land, first and second homes, and home improvement projects each year. We’d love to help you with a mortgage or home equity line of credit; contact us online or call us at 800-991-2221.