What Is a Bridge Financing?
Bridge financing, also known as an interim loan, is gaining in popularity. When a homebuyer plans to purchase a new home before selling an existing one, there are two common ways to obtain the necessary down payment: a bridge mortgage or a home equity mortgage (or Home Equity Line of Credit, HELOC).
Generally, a home equity loan is less expensive, but bridge financing offers more benefits for some borrowers. In addition, many lenders will not issue a home equity loan if the home is still on the market. We will help you compare the benefits between the two options to determine which is more suitable for your particular situation.
What is a Bridge Loan?
A bridge mortgage is a temporary loan that bridges the gap between the sale price of a new home and a homebuyer’s new mortgage. If the current home has sold but the transaction does not complete before the closing on the new purchase a bridge loan is secured by the buyer’s existing home. The funds from the bridge loan are then used as a down payment on the new home.
Rates will vary among lenders. The following is an average estimate for a bridge loan. Interest rates fluctuate, but for this example, let’s use 8.5%. This type of bridge loan will carry no payments for four months; however, interest will accrue and be due when the loan is paid upon sale of the property. Here are some possible fees:
- Administration fee: $750
- Appraisal fee: $375
- Escrow fee: $350
- Title policy fee: $350+
- Notary fee: $40
- Recording fee: $65
- Wire/courier/drawing fee: $75