When a couple or family is seeking to move to a new home, they may consider financing options that allow them to create a time gap between the sale of their old home and the purchase of their new one. A “bridge loan” mortgage is designed precisely for cases like this.
Like any type of mortgage, a bridge loan comes with both benefits and disadvantages related to cost, terms and conditions, and more. For this reason, it is important for homebuyers to be well-informed about this type of debt instrument. Read more about what a bridge loan is and how it works below.
What is a Bridge Loan?
A bridge loan — also sometimes called a “swing loan” or “interim financing” — refers to a short-term, temporary loan that is meant to serve as a financing option during a period of transition, like moving from one home to another. This type of loan can often be the preferred option for homeowners who become subject to unexpected life circumstances, like the obligation to suddenly relocate for a new job.
It’s also important to note that a bridge loan shouldn’t be taken out as a replacement for a traditional mortgage and only be used for transitions. However, bridge loans are similar to regular mortgages and home equity lines of credit in that a given couple or family’s current home serves as collateral. Most bridge loans are typically paid off between six months and three years.
How Bridge Loan Terms Can Vary Extensively
A majority of bridge loans share some broad traits. For example, many can be repaid within six months and carry high interest rates that can accrue at anywhere from the prime rate to 2 percent above prime. Also, most lending institutions will rarely offer bridge loans to borrowers who don’t pledge to use that same lender to finance their new home’s mortgage. Lenders will also usually only offer these types of loans to customers with high credit scores and low debt-to-income ratios.
However, the cost, terms and conditions of a bridge loan can change significantly. Some bridge loans require monthly payments, while others carry lump-sum interest payments at either the beginning or end of the term. Additionally, some bridge loans are designed for borrowers to finish repaying the entirety of their old home’s first mortgage at the end of this financing option’s term, while others add the newly-created debt to the old mortgage.
Some bridge loans can also carry hefty origination fees. These are upfront charges a lender imposes upon entering into a loan agreement in order to cover the cost of processing a new loan application. Origination charges, coupled with closing costs, can thus make bridge loans very expensive.
When the real estate market is in flux, transactions involving bridge loans can often fall apart. Sometimes, borrowers can become stuck in a difficult situation if they can’t sell their old house or receive financing for a new home.
In these cases, lending institutions may end up foreclosing on the old home following the expiration of a bridge loan’s extensions. Alternatively, borrowers could legally transfer their old house to the lender via a deed and the bank could then use the proceeds to repay the loan.
Customers seeking alternatives to bridge financing can pursue options like borrowing against a 401(k) or taking out loans secured by bonds or stocks. Certain lending institutions also offer hybrid mortgage products that mirror the functions of bridge loans. Homeowners who pursue these financing options could combine their old and new mortgages, pay only one set of closing costs and substantially reduce the amount of additional costs for their second house.
Home Equity Loans
Home equity loans also function as a common substitute for bridge loans. Both types of mortgages use a customer’s current home as collateral.
However, home equity loans are typically long-term debt instruments that are paid off between anywhere from 5 to 20 years. Applicants who qualify for these types of loans can also receive lower interest rates.
Customers who use a home equity loan to finance a portion of a new house, nevertheless, risk ending up with more debt if they can’t sell their old home. Borrowers in this case can become stuck with three loans: the old mortgage, the new mortgage and the home equity loan — which customers may have used for a down payment, for example.
Help With Bridge Mortgage Loan Application Process
The process of learning about and applying for a bridge mortgage loan isn’t easy, but customers can receive more information by contacting Virginia-based Fairfax Mortgage Investments. FMI boasts mortgage specialists who are fully licensed in Virginia, Maryland and Washington, D.C. and who hold more than three decades of experience.
The company also offers expert advice and customized loan package development, as well as specialty financing programs for military personnel, first-time homebuyers and home improvement projects. Prospective homeowners can contact FMI online or call (703) 214-7255 for more details.