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Bridge Loans - An Effective Tool For Selling in a Stagnant Real Estate Market

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  • Bridge Loans - An Effective Tool For Selling in a Stagnant Real Estate Market

    Bridge loans are an effective tool for those looking to sell an existing home and buy a new home. A bridge loan enables you to make an offer on a new home without having the offer contingent on the sale of your existing home. The fewer contingencies in an offer, the more likely you are to get a good deal.

    With a bridge loan, you're able to carry the mortgage on your existing home and take out a mortgage on a new home at the same time.

    Also known as "swing loans" or "gap loans," bridge loans are short term loans and, as such, tend to have higher interest rates than conventional home loans. There's an inherent risk in bridge loans due to the fact that your existing home may not sell in the timeframe specified in the bridge loan contract. Given the length of time that homes are sitting on the market these days, you should try to get a bridge loan for a period of up to a year, unless you're certain your existing home will sell faster than that. Many lenders will only issue bridge loans for six months, so you may have to renew the bridge loan if your existing home doesn't sell in that six month period.

    There are two types of bridge loans. For those with more limited available funds, one type of bridge loan allows you to borrow enough money to pay off your existing mortgage, plus enough to make a down payment on your new home.

    With this type of bridge loan, you only make your regular monthly mortgage payments for your new home. Once your old home is sold, you pay back all of the accrued interest and the outstanding balance of mortgage payments from the old home that were covered by the bridge loan.

    The other common type of bridge loan is designed for people with more available income. The bridge loan gives you the money for the down payment on the newer home. You continue to make the mortgage payments on your old home, plus you make mortgage payments on your new home. When your old home is sold, the accrued interest and principle on the bridge loan for the down payment is repaid.

    Because bridge loans effectively have the borrower carrying two mortgages at the same time, the income requirements are much more stringent than for a straightforward mortgage loan. You'll need to have very good income with little debt, excellent credit, and the amount of money available to you will depend upon a number of factors.

    Some lenders will allow you to borrow a certain percentage of the market value of the home you're selling, less the outstanding balance. So, if your existing home is worth $250,000 and the balance you owe on the mortgage is $100,000, you'll be able to borrow some percentage of the $150,000 difference.

    Other lenders will only allow you to borrow a certain percentage of the equity you have in the existing mortgage. So, if the mortgage you took out on your existing home was $150,000 several years ago, and you still owe $100,000, you'll be able to borrow some percentage of the $50,000 equity. The fact that the home is now worth $250,000 doesn't matter.

    You stand a better chance of getting a bridge loan approved if you use the same mortgage lender that you use for your new home mortgage.

    In addition to the stringent requirements you need to meet to get a bridge loan, the reality of carrying three loans (your original mortgage, your new mortgage, and the bridge loan) can be unsettling. You're taking a risk by assuming that your existing home will sell, and will sell for somewhere near the price you had in mind.

    There are alternatives to bridge loans. For example, you can borrow money for the down payment on your new home from your 401K or any other secured assets you own. Often you can take out a home equity loan against your existing home and use the proceeds as the down payment for the new home.

    In any of these cases, though, you'll still need to qualify to carry two mortgages. If your financial situation won't permit that, you'll want to make your existing home as appealing as possible so that it sells quickly. You may want to even consider selling your existing home first, and then renting until you find the new home you want.

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