Refinance :: Home Equity Mortgage Refinance Loan :: Second Mortgage Loan Refinance

Bridge Loans

The two kinds of bridge loans
The dangers of a bridge loan
Alternatives to bridge loans

You know you want to move, so just for fun you begin looking at homes for sale. Then, the impossible happens - you find the home of your dreams but haven't even listed your old home yet.

What to do?

The Realtor, who naturally wants you to hurry up and put an offer on the new home, suggests a Bridge Loan. But that might not be in your best interests.

This very specific loan is designed to bridge the gap when your old home hasn't sold and you need a down payment on your new home loan.  It is a tool to use when you need it, but it generally carries a higher interest rate and higher loan fees than a regular home purchase loan.

The two kinds of bridge loans

You can choose from two types:

• A new home loan that pays off your old home mortgage loan and gives you extra cash to use as a down payment on your new home. Usually, closing costs and six months prepaid interest are added to the mortgage balance and paid to the mortgage lender at the outset. If your old home sells before the six months have passed, you are credited back for the unused interest.

You make no payments on the new home loan for six months. Then, if your old home does not sell within the six month period, you begin making interest-only payments on the loan.

• A new and additional loan against the equity in your old home - which is, essentially, a "third loan." This is similar to taking a second mortgage on your present home, but is tied in with your new home purchase mortgage loan.

Again, you pay six months interest up front, and there are no payments for the first six months.

In most cases, you'll be required to use the same mortgage broker or mortgage banker for your new home loan as for the bridge loan.

The dangers of a bridge loan

In a fast-moving real estate market you wouldn't usually need a bridge loan. Your old home would sell quickly, giving you the down payment money you need. In a slow market you run the risk that your old home will not sell within the first six months - or even within the first year.

If the house doesn't sell within 6 months, you'll face an additional, or second, mortgage loan payment. Or, if you chose to keep the original mortgage on your own home - a third mortgage loan payment.

Most lenders won't grant the bridge loan unless you have sufficient income to cover all these payments, but they can still put a heavy burden on your monthly budget. Sometimes your personal expenses are such that lenders believe you "can" spend more than you know you can comfortably spend on a house payment.

Since most bridge loans are only structured for one year, you could face the need to re-finance again when the loan comes due in 12 months.

Discuss your needs with your Mouse House Mortgage Loan Advisor. He or she may be able to structure a purchase loan that can get you into your dream house without resorting to the use of a bridge loan.

Alternatives to bridge loans

Because bridge loans are both expensive and risky, it's a good idea to explore the alternatives. You could:

• Borrow from your 401K
• Borrow against stocks or bonds or an insurance policy
• Borrow against a certificate of deposit
• Borrow against a car, boat, or motor home. 
• Get a home equity line against the equity in your current home*
• Borrow against equity you may have in residential investment property.
• Get a "gift" from a family member to make up whatever shortfall you need.
• Use a credit card. While this sounds like the most risky choice of all, credit card companies are now offering extremely low interest rates that stay in place for cash advances - and some of them stay low until the balance is paid off. If you need an extra $15,000 and can borrow it at 3%, this could be a good choice! 

Check with your Mouse House Mortgage Advisor to see how this would affect your credit score.
*Caution! If you plan to take out a home equity line of credit against your current home, do it before you put the home on the market. Almost all mortgage lenders have policies that prohibit granting loans to current owners against homes that are listed for sale. Lenders make much of their money over the long term and don't want to lend when they know they'll be repaid within just a few months. That is, they don't want to do it unless they collect extra fees up front.