There are many reasons you might want to sell your current home and buy a new one. Are you getting married or planning to expand your family? Do you want to upgrade from your starter home to a home that better fits your lifestyle? But how exactly do you purchase new if your money is tied up in your current mortgage and you have yet to sell your existing home?
We may have just the answer for you. A bridge loan could be exactly what you need to bridge the gap in time between your new home purchase and the sale of your old home. So how exactly does a bridge loan work and what do you need to know if applying for one? Sit back and relax. We’ll explain exactly what a bridge home loan is and how you can take advantage of one.
Bridge Home Loan Explained
A bridge home loan helps you secure financing from a lender for a new home before you actually close on the sale of your old home. For instance, you may find the perfect home before you get an offer on the house you’re trying to sell. But many people find it difficult to make a down payment on a new home when most of their money is going toward existing collateral.
A bridge home loan affords you the time to hold out for the right offer while still being able to move ahead with your new home purchase. You can use the financing you secure from the bridge loan toward the down payment of your new home. Essentially, a bridge loan helps you buy a new home while also buying you time to sell your old one.
So how does a bridge loan work? In much the same way a conventional mortgage does, but with a few exceptions. When you close on a bridge loan, you use your existing home as collateral to secure the funding to close on the new home. Once you sell your former home, you will do a refinance using your new home as collateral so that you can pay off the balance on the bridge loan.
Advantages of a Bridge Loan
There are many advantages to securing a bridge home loan. First of all, it ensures that you have more time to secure the best possible offer on the home you are trying to sell. As you’re probably aware, the housing market fluctuates. When the housing market is saturated with inventory, the market tends to favor the buyer. But when the supply is low and the demand is high, the market tends to favor the seller.
During a buyer’s market, a bridge home loan allows you to take advantage of buying a new home at a competitive price. Likewise, if mortgage interest rates are low, you can lock in a competitive interest rate on your home loan purchase without feeling the pressure of selling your home quickly in the midst of a buyer’s market.
Typically, bridge home loans require you to make interest-only payments for the first year. That gives you a full year’s time to find the right buyer with the right offer. This works to your advantage because it often makes more financial sense to weigh several offers over time rather than just accepting the first offer that comes along.
In addition to allowing you more time to find the right buyer, bridge loans can also save you the expense of moving into temporary housing or storing your belongings in the time between closing on your new home and selling your old one. Instead, you can seamlessly transition from your old house into your new home since a bridge home loan allows you to hold on to both properties at the same time.
If you’re considering applying for a bridge home loan, the key is to make sure you can afford the bridge loan payments in addition to your monthly mortgage payment. While you are typically only required to pay only the interest on the bridge home loan for the first year, you should be prepared to make the full loan payment if your home does not sell within that time.
Trying to decide whether a bridge home loan is right for you? Check out this Forbes article for a breakdown of the pros and cons, as well as an estimate of bridge loan financing costs to help determine whether it would be beneficial for you to apply for one.
How to Apply for a Bridge Loan
If you’ve done your research and feel a bridge home loan would work to your benefit, the next step is to secure financing. Just as you likely did when you closed on your first home, you should shop around so that you can find the right lender.
Keep in mind that there are many factors to consider. Of course, you probably want to try to get the best possible interest rate. But there are other aspects you should also take into consideration. For instance, does the lender charge closing costs and, if so, how much? Also, what is the maximum amount of financing you can secure?
Some lenders, such as Solarity Credit Union, allow you to secure financing equal to 90 percent of the appraised value of your current home. Solarity also offers a convenient closing option so you can close on your bridge loan and new home purchase at the same time. It’s a one-stop option that makes loan closing quick and easy so you can focus all your time and energy on getting settled into your new home instead.
If you live in Washington State, give Solarity a call. Their Home Loan Guides can answer your questions and show you all the possibilities that await you on your journey to finding your new home.