Bridge financing can be described as a short term loan taken out by a borrower against their current property to finance the purchase of a new property. Typically good for a six month period, it may be extended for up to 12 months.
These loans generally contain more benefits for borrowers because many lenders will not lend on a home equity loan if the home is on the market.
This is a common way to find the down payment for the move-up. These loans may also become a bit more common as sellers experience more difficulty in unloading their homes.
How does the bridge financing down payment work?
Bridge Financing can be structured into two loan types:
To completely pay off the existing loan on the current property
In this case the bridge loan pays off all existing loans and uses the excess as down payment for the new home.
It can be a second loan of top of the existing loan
The bridge loan is opened as a second or third mortgage and is solely used as the down payment for the new property.
Important factors to consider:
Using bridge financing for a down payment ca be quite risky. This is because the borrower essentially takes on a new loan with a higher interest rate. In addition, there is no guarantee that the old property will sell within the allotted life of the bridge loan.
It’s important to do your research to see what the asking prices are and how long home are generally listed before they’re ultimately sold. This will give you a better idea of what you can expect when you are trying to sell your home. Keep abreast of changes in interest rates as well as inflation, as these are usually good indicators of the real estate market standing.