It can be difficult to buy a new home when you already own one and are still carrying a mortgage. You will not be able to qualify for a new loan until you have successfully sold your current home. However, you likely do not want to sell your home and move into a living situation that is temporary. That just serves to create its own host of problems. Instead, there may be a more feasible option available to you.
If you want to avoid a temporary living situation, you likely will need a bridge loan. It is a good option for many homeowners who find themselves in this situation. With a bridge loan, you can move into your new home before selling your current one. Let us look at just how bridge loans work.
What is a Bridge Loan?
If you are in the process of buying a new home but still own your current one, you have limited options. Basically, you have three choices available to you. They are:
- Sell your home before looking for a new one.
- Make an offer on a new home that includes a contingency. That contingency would be that you have to sell your current home in order to purchase the new one.
- Obtain a bridge loan so you can buy your new home while still owning your current home.
A bridge loan is basically a very short-term solution that allows you to make your transition more smoothly. It is a loan that helps you to move from your current home to a new one without having to sell your current one first. You likely are not able to carry two mortgages simultaneously, if for no other reason than because your debt-to-income ratio will not allow it.
Using a bridge loan means paying off your current mortgage and using the rest of the money to pay fees associated with closing on your new home, such as a down payment or closing costs and fees.
A bridge loan typically only lasts for a maximum of 6 months and they typically offer only two repayment structures. You can pay the interest as it accrues every month or you can pay the full interest payment when you pay off the loan at the end of the loan term.
How Does a Bridge Loan Work?
Bridge loans are actually quite straightforward in their functionality. The lender can give you a maximum of 80% of the value of your home. With that money, you can pay off your existing mortgage. The remaining balance can go toward closing costs for the bridge loan and the down payment for the new home.
With the help of a bridge loan, you can move into your new home before you have successfully sold your old one. When the old home does sell, you simply pay off the bridge loan, along with any interest or fees that have accrued.
Then, you are left with just your one monthly mortgage payment for your new home. That is basically how bridge loans work. It is quite straightforward and easy to understand.
Benefits of Utilizing Bridge Loans
There are several advantages to accessing a bridge loan. The biggest benefit is obviously that you are able to move into your new home without having to sell your current one first. While contingencies are possible, their efficacy depends on several factors, including the housing market. If it is a seller’s market, it is very hard to compete with other buyers who do not have contingencies. It is unlikely the seller of the home will take an offer that has a contingency over one that does not.
You are also able to put your home up for sale right away and you can buy a new one without any limitations. You can save money with a bridge loan as well. For example, you will not have to spend money on a temporary living situation or on storage fees.
Finally, there are no prepayment penalties with a bridge loan and there is some flexibility when it comes to how you pay the accrued interest. You can delay the interest payments if you would like and just repay it all at once at the end of the loan period.
Attaining a Bridge Loan to Finance Housing Transitions
If it seems like a bridge loan could be a good option for your situation, you want to speak with a reputable lender to secure your loan and review your options. Likewise, if you have more questions as to how bridge loans work, speaking with an expert can be helpful in determining if this is a good option for you.
Fairfax Mortgage Investments has been helping residents of Washington D.V., Maryland and Virginia with the home buying process since 1990. Reach out today to go over the possibility of using a bridge loan to help you make the transition from your current home to a new one.
