The Ins and Outs of Bridge Loans

In general terms, it’s always best to sell your house before you buy a new one. But that’s not always possible… Depending on how things work out, you may need (or at least want) to buy a new home before you sell your old one. The problem here is that many homeowners can’t afford to do this. If you’re ever in such a bind, one possible solution is a bridge loan.

Bridge loans are short term (six month), interest only loans that are secured by your old home, and provide funds for the downpayment on the new home. While they often have interest rates that are competitive with a home equity lines of credit (HELOC), application fees and closing costs can drive up the effective interest rate on a bridge loan. While it sounds attractive on the surface, keep in mind that there’s a good bit of risk involved if your old home doesn’t sell as quickly as you had hoped, or if a pending sale goes south. Although you can usually renew a bridge loan for a second term (i.e., an additional six months), it’s always possible that the lender could be forced to foreclose on your old property to cover what you owe.

If a bridge loan isn’t for you, what other options do you have? One possibility would be to borrow against your 401(k), or to take out a bank loan secured by stocks, bonds, or other assets. Another possibility would be a hybrid mortgage, wherein you obtain a combination first and second mortgage on your new property, and then use the proceeds of the sale of your old home to pay off the new home’s second mortgage. The advantage here is that a hybrid loan involves less in the way of closing costs.

[Source: Bankrate.com]