What Is a Mortgage Bridge Loan?
Bridge loans make the best financial sense when home sales are brisk. During sluggish economies, homes may take longer periods to sell. Using a bridge loan to close a new home purchase while carrying the existing mortgage can create a heavy burden for the borrower. For these reasons, financial advisers may recommend selling the original home, then obtaining a new mortgage.
Bridge loans differ according to costs, conditions and terms. Certain bridge loans require the payoff of the homeowner’s first mortgage at closing; others simply add more debt to the borrower’s name. Bridge loans differ in the calculation of interest. A monthly repayment schedule at a fixed interest rate affords more certainty than a variable rate. The lender may also require heavy front-end or back-end payments. Borrowers may qualify for unsecured bridge loans, according to “The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs.”
Specific terms, rather than open-ended bridge loans, also provide more certainty to borrowers. The lender’s home usually collateralizes the bridge loan. A bridge lender may also claim the new mortgage loan’s underwriting as a requirement for the bridge. Interest rates differ according to the institution and borrower credit. An existing mortgagor, depending on the lender’s payment history, may extend a new bridge loan.
Calculate the real cost of a bridge loan before agreeing to the terms. For example, origination costs, fees, closing costs and interest charges may whittle away equity of an existing home. Bridge loan fees can be costly. If a customer pays several thousand dollars in closing costs, then 1 to 4 percent of the loan’s value in origination fees, she has less money to buy a new home. Less-than-robust real estate markets add to the danger of real estate bridge loans. If the lender’s existing home takes more time to sell than the bridge loan’s original term — usually six months or more — the bridge loan costs continue to accrue. In the worst case, the borrower may lose her original home to the lender to pay off the bridge loan.
Bridge loans may assess penalties for early repayment. Read the lender contract carefully to determine any costs associated with the schedule of payments and terms. Consult your tax adviser about a bridge loan’s deductibility. Unsecured bridge loans aren’t mortgages. Consider the date of debt in both the bridge loan and new mortgage. Using the date of application of the mortgage loan may ease this issue if the bridge loan isn’t secured by home equity.
Alternatives may provide less-costly solutions to mortgage bridge loans. Offer a contingent sale agreement when bidding on a new home. Sellers may reject this proposal in a brisk home sales environment, but they may accept this type of agreement during sluggish markets. Borrowing funds from a retirement plan or money from family and friends may also provide a more attractive solution than a mortgage bridge loan.