When To Use Bridging Loans

February 27, 2012 by  Filed under: Loans 

You presently have your house on the market to sell when you see it, the house of your dreams, just waiting for you. The only thing standing between you and your dream house is the vendor who needs to close title immediately. You know you can secure the home loan in time, but how do you acquire the outlay from the residence you are endeavoring to sell? The solution is a bridging or bridge loan.

A Bridge loan is short-term financing, usually repayable in less than a year, and secured by either a first or second mortgage against the real property being sold by the borrower. A first mortgage loan provides enough money to pay off any existing liens, and the balance of the money is available to use as the down payment on the new home. A second mortgage loan only provides enough money for the down payment on the new home.

When the housing market is strong, and homes are selling quickly, bridging loans are infrequently used. They become popular during a buyer’s market, when the inventory of homes for sale is high, and houses take longer to sell.

If you find yourself in a situation where you need temporary funding to bridge the gap between the purchase of a new home, and the sale of an existing one, here are a few things to consider:

Bridge loans can be expensive. The interest rates are higher than the rates for long-term mortgage financing, as are the closing costs. It is common for bridging loan closing costs to include points. Each point charged is 1 percent of the amount of the loan that the borrower pays to the lender at the closing. Lenders make money in two ways: on the interest paid over the life of the loan, and on the points charged. Because of the short-term nature of bridge loans, banks make up for it with higher interest rates and points. It is common for a lender to charge 2 to 4 points or more.

Be careful of prepayment penalties. Lenders try to maximize their profit by forcing borrowers to keep the loans and pay interest for a minimum length of time. A borrower who tries to pay the loan off earlier than the minimum number of months set by the lender has to pay a fee as a penalty. Depending on the terms of the loan, the prepayment fee can be substantial.

Taking on a high interest debt can be risky if your house does not sell as quickly as you expected. Yes, a short-term will allow you to get the home of your dreams, but this can quickly turn into a nightmare. Once you close title on your new home, you will have mortgages on two houses until one of them sells. The financial damage of high interest accruing over a longer period than you anticipated can be devastating.

Before going ahead with a bridging loan, talk to your real estate agent. Ask your agent to do a market analysis to make certain that the house you are selling is priced competitively with other properties that have recently sold in the area.

Finally, explore other short-term financing options such as a loan or withdrawal from a retirement plan or life insurance policy.

Property bridging finance is ordinarily a short term financing option used prior to long term finance being agreed.

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