Buying a new home when you own another one with a mortgage can be a complicated situation. Most lenders won't qualify you for a new loan until you have sold your current home. Unless you're comfortable with moving into a temporary living situation, you'll need a bridge loan. Our REALTORS® are happy to explain what bridge loans are, how they work, and why they're an attractive option for homeowners who are in fixed situations.

What is a Bridge Loan?

It's all in the name. A bridge loan is a type of financing that is meant to bridge the gap between closing on a new home and selling an existing home. Also called "gap financing" or a "wrap," bridge loans enable individuals to address current needs before securing a mortgage or long-term loan. Bridge loans are usually short-term and can be arranged with little documentation. If you urgently need to buy a new home but are still saddled with your current one, you can facilitate the purchase with a bridge loan. In this case, your existing property becomes the collateral for the loan.

How Does a Bridge Loan Work?

Typically, you must have equity in your home to qualify for a bridge loan. Most lenders will offer a loan of up to 80% of the combined value of both homes. Let's say your current home is valued at $200,000, and you've found a home selling at $300,000. With a lender giving you 80% financing, you can borrow up to $400,000. Remember that you will need to pay off the current mortgage and may need savings or home equity for a down payment. You're able to move into your new home while your current one is still on the market. And once it sells, you pay off the bridge loan and apply for a long-term mortgage.

Terms Can Vary

The terms, conditions, and costs of bridge loans vary widely and this usually depends on the lenders. Some bridge loans are structured in a manner that pays off the old home's original mortgage while others add the new debt on top of the old one. In the latter option, so you'll be making two monthly loan repayments. Some bridge loans are paid on a monthly basis while others require lump-sum interest payments at the end of the term.

Most bridge loans, however, share some general characteristics. They are short-term financial measures and usually run for six months to a year. Also, lenders rarely extend the term unless the borrower agrees to take out a mortgage for the new home with the same institution. The lender might offer you some payment flexibility as you wait to sell your home.

Pros and Cons of Bridge Loans

A bridge loan allows you to secure opportunities that you would miss due to a lack of available funding. And you can do this without putting financial contingencies on your offer. Qualifying and getting approved for a bridge loan is much faster than a traditional mortgage. This gives you the convenience of moving to a new home without having to rent an apartment and then moving again after you buy another home.

While taking a bridge loan offers you so much convenience, it could leave you with the burden of paying off the new loan and your old home's mortgage. And if your home doesn't sell before the end of the term, you risk having your home foreclosed, which might leave you with no home. Also, with bridge loans being short-term financing, they come with high interest rates. So before you make the move, you have to be sure that your home will sell and that you'll be comfortable with the rates and payments.

Not sure if a bridge loan is right for you? Our real estate agents will help you find Beavercreek homes for sale and make the best decision for you and your family. Contact Wright-Patt Realty to learn more.