What is a bridge loan and how does it work.
It is a short-term bank loan of the equity in the home you are selling. You may take out a bridge loan, or interim financing, to help with a knotty situation: closing on the home you are buying before you close on the property you are selling. This loan basically enables you to have a place to live after the closing on the old home.
The key to a bridge loan is having a qualified buyer and a signed contract. Usually, the lender issuing the mortgage loan on the new home will write the interim financing as a personal note due at settlement on the property being sold.
If, however, there is no buyer for the property you have up for sale, most lenders will place a lien on the property, thereby making that bridge loan a kind of second mortgage.
Things to consider: interest rates are high, points are high, and there are costs and fees involved on bridge loans. It may be cheaper to borrow from your 401(K). Actually, any secured loan is acceptable to lenders for the down payment. So if you have stocks or bonds or an insurance policy, you can borrow against them as well.
So basiclly it is this: A "bridge loan" is financing secured by your current home, a home typically listed for sale. The bridge loan is used to finance the purchase of the second home and is paid off when the first home sells.
In addition to other questions, when considering a bridge loan seller/borrowers should ask about interest costs, up-front fees (because bridge loans are short-term financing, it's better to pay a higher interest rate than points for a loan which will generally last just a few weeks or months), and what happens if house #1 takes longer to sell than anticipated.
A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory.
Also known as "interim financing", "gap financing or a "swing loan".
As the term implies, these loans "bridge the gap" between times when financing is needed. They are used by both corporations and individuals and can be customized for many different situations. For example, let's say that a company is doing a round of equity financing that is expecting to close in six months.
A bridge loan could be used to secure working capital until the round of funding goes through. In the case of an individual, bridge loans are common in the real estate market. As there can often be a time lag between the sale of one property and the purchase of another, a bridge loan allows a homeowner more flexibility.
REALTOR® & Affordable Housing Specialist
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AIM/YAHOO. Caroline Simmons