Will you be buying another home in 2021? If so, you’ll likely want to use the proceeds from the sale of your current home to purchase the new one. But, coordinating the timing of both transactions can be tricky, particularly if the closing date of the sale is set to occur after the purchase. Thankfully, bridge financing is available to help make this transition from one home to the next run much smoother.
This type of short-term loan bridges the financial gap between two different closing dates by allowing you to access the equity in your existing home to put towards the down payment on the new home without waiting for the sale to close first.
To be eligible for a bridge loan, a firm sales agreement must be in place on your existing home. And, once it sells and closes, the amount borrowed, plus any accrued interest, can be repaid with the proceeds.
How does it work?
With bridge financing, you’re only borrowing the amount needed for your down payment. And since this amount is smaller than a traditional mortgage, the application, approval and funding process is typically faster for a bridge loan, which helps speed up your new home purchase.
Most bridge funding is used for down payment purposes, but it can also be used for renovations or moving costs. Regardless of the use, however, the amount you borrow can’t exceed the amount of equity in your current home.
While the average loan period for bridge financing is six months, it can range from much shorter to even longer depending on your specific situation.
Bridge loans typically include higher interest rates than traditional, long-term financing options, but the trade-off is being able to purchase your new home before your current one closes, which can save you a lot of stress worrying about losing out on your ideal property. You should also expect to pay a number of added expenses including legal costs, as well as lender and administrative fees.
Not all lenders offer bridge financing. Your mortgage agent will be able to secure the best bridge loan available to meet your unique needs.
Have questions about bridge financing or your mortgage in general? Answers are a call or email away!