If you want to buy a new home before selling the current one, getting a bridge loan might be a good option for you.
What is a bridge loan?
A bridge loan can be used in both commercial and residential real estate. It is a short-term loan that you can take out to use the money to finance the purchase of a new property.
How does a bridge loan work?
Although a bridge loan can be structured in many ways, the money is generally used to pay off the mortgage of your current home.
Let’s say your current home is worth $300,000 and your existing loan is $200,000. Your new dream home is worth about $400,000. In the case where you haven’t sold your current residence and need to close on the new home, the bridge loan helps you to close that purchase before your current house sells.
You can finance up to 80% of the loan-to-value ratio of your current home, in this case, $240,000. It will pay off your current loan of $200,000, which leaves you $40,000 to spare. If the total closing costs and fees are $5,000 then you will have an additional $35,000 to put down (usually with other funds) towards your new home.
Pros and cons:
Pros:
- You can make an offer on your new home without a financing contingency (sometimes considered “cash offers”)
- Interest payments may be deferred until you sell with some bridge loans.
Cons:
- Interest rates and fees on a bridge loan can be higher than typical mortgage rates.
- It can be risky because there is no guarantee that you can sell your existing home in a timely manner
Getting a bridge loan can help you buy a home, but you need to consider if it would affect your long-term financial situation.