How To Use A Bridge Loan To Buy A New Home Without Selling

Bridge loans are home loans that are used to purchase a second property while using the first one has security. People who are shifting to a new home without having sold off their first one commonly use bridge loans. Many people are required to move to a new home as changes may occur such as birth, marriage, divorce, job transfers, retirement or any other change that requires moving. The question that arises in the minds of most people is should you sell your current house before buying a new house or should you buy first and then sell later.

There are risks associated with both actions. However it is considered far less risky to sell your current house before buying a new one or to sell your house concurrently with the purchase of your next one. The reason is that most of the people will find it extremely difficult to afford owning two houses simultaneously. Most people also need to use the proceeds from the sale of the first horse to buy the next one.

However, many people also take the risky approach of purchasing a new home before selling off their old ones. This is where bridge loans coming into practice. Bridge loan get the money required for the purchase of a second house without actually having sold off the first one they are usually made by pulling out a portion of the equity in the house before it has been sold. This can be risky and these are the reasons why.

Bridge loans are expensive

Since the bridge loan is usually a second mortgage or a home equity line of credit, loan origination fee as well as the interest rate can be significantly higher than conventional first mortgage. The bridge loan interest rate is directly related to the loan to value ratio of existing first mortgage.

You can get at the best possible interest rate on a bridge loan if you keep the total amount of your old house existing mortgage plus for this loan under 75% of the houses fair market value. From a risk assessment standpoint, lenders know that the risk of known before increases tremendously when the loan to value ratio exceeds 75% to 80%.

You could losing a lot of your savings

When you’re use a bridge loan to purchase a second home you may end up depleting a lot of your cash and savings. This could happen if you first home does not sell as quickly as anticipated. In that case you would have to maintain three mortgages that will be the first mortgage on the first home, bridge loan on the home of and the mortgage on your new home. You would also have to pay for separate property taxes, insurance premiums, utility bills is etc. this problem will compound itself if the two homes happen to be located in different parts of the country or state.

You could loose both homes

You could lose both the houses if the property prices happened to decline while you’re waiting for the first one to sell. If that happens you may not be able to sell it for enough to pay off the outstanding loan on the first house. In that case you would have to face foreclosure on a new home to make up for the shortfall.

Bridge loans are okay for people who can afford to maintain the cost of having multiple loans till the first home sells. However, for the common borrower they can be tricky a proposition and a great potential for financial trouble. If the first house has a confirmed sales contract, if your transaction is currently in escrow, you may consider taking a bridge loan since you are very close to selling the first home. However, the deal can always fall through which still makes a bridge loan a risky proposition. Bridge loans should be approached with extreme caution and considered a last resort. Although it may take time to sell your current house and then purchase a new one, it may be the most prudent action to take.

 

What is 80-10-10 Financing

80-10-10 kind of financing is quite common. This kind of financing applies for a borrower who cannot afford to make 20% down payment on his mortgage. Many people fit into this category even though they are high earning individuals. Unless you have practiced savings tactics, you could find it difficult to come up with plenty amount of cash equal to 20% to make the down payment.

Now what happens when you do not make that 20% magic figure? If you have read our previous sections you will know that if you do not make 20% of down payment you are most likely to be charged private mortgage insurance, PMI.

For this reason a new financing technique was involved which was known as the 80-10-10 financing. This financing helps you to come up with 20% of down payment where you only put 10% and pay the other 10% by taking a second mortgage. This allows you to circumvent the monthly PMI payment and also a higher rate of interest on your mortgage.

Do not get too hung up on the terminology when we say 80-10-10, as this could be in any other competition as well such as 80-15-5 which means that you only put down 5% down payment and gets the other 15% from your second mortgage.

This kind of financing also help to avoid a jumbo loan if the amount you are borrowing goes beyond the limitations set by Fannie Mae and Freddie Mac on conforming loans. If the amount you are borrowing on a first mortgage exceeds this amount you can use this method to break it down into first and second mortgage and thereby cut down your interest rate by up to .5%. This is so because interest rates on nonconforming loans and jumbo loans are usually higher than conforming loans.

Common Sources Of 80-10-10 Financing

From house sellers

People selling their homes offer a second mortgage either as marketing techniques to induce buyers or because they want to generate income from the loan. Many sellers, specially during the times when selling a home is difficult, offer financing to the borrower.

When the home owner carries a second mortgage it is generally less expensive than a second mortgage made by lending institutions such as banks and credit unions. Also most of the home sellers do not charge for loan origination fee. Seller second mortgages are nearly always short-term balloon mortgages that become due 3 to 5 years from the date of origination.

If you are getting sellers financing for a second mortgage lender for the first mortgage will probably want to review the terms and conditions of the second mortgage. The lender will need to be assured that the payment due on the second mortgage does not make the payment on the first mortgage difficult.

He should be assured that you are not overextending your finances and hence risk the foreclosure in the future.

From institutional lenders

You can get this kind of financing from the same institutional lender who makes you your first mortgage. The terms and conditions will differ from one lender to another. Some mortgage lenders will structure the second mortgage as home equity loan whereas others may offer the conventional second mortgage.

The second mortgage may be a fixed-rate mortgage or an adjustable rate mortgage with a balloon payment. Most of the times second mortgages are adjustable rate mortgages.

If the second mortgage is fully amortized it is usually structured as a 15 year mortgage. As mentioned before, 80-10-10 financing can be structured in any format such as 80-5-15 or 80-15-5.

The lesser down payment you make the more of a risk the lender is taking in giving you a mortgage. So an 80-15-5 will have a higher interest rate and origination fee than a 80-10-10 financing because you are only paying 5% down payment. Also, 80-10-10 will have a higher interest rate as compared to traditional mortgage on which you make a 20% down payment.

Balloon Mortgage – Advantages, Features and Variations

What is Balloon Mortgage, different types of balloon mortgages and why and if you should choose a balloon home loan

Simply put, balloon mortgage mortgages are home loans that require the entire amount to be paid off after a certain period of time by making a large payment equivalent to the balance remaining on the loan. Usually these kind of mortgages amortize during the initial few years but then required to be completely paid off much sooner than the entire term of the mortgage is over. As we have discussed earlier the meaning of amortization is that each monthly payment is equivalent to the amount that will pay off your mortgage completely if you continue to make that payment for the entire term of the mortgage.

First mortgages are usually completely amortized. After you make the last payment according to your amortization schedule your mortgage should be completely paid off. However, most of the second mortgages are balloon mortgage is where they become due long before there are close to being fully repaid. Although second mortgages can also be fully amortized mortgages, they are often balloon home loans.

The final installment that pays off for second mortgage completely with its entire remaining principal balance is called the balloon payment. Many lenders also refer to balloon home loans as bullet loans because they have the ability of blasting mortgage borrower of their feet and into financial and fiscal doldrums.

Balloon mortgages have their own advantages where they can augment your cash for a down payment, reduce your interest rate or help you put equity out of your present home to buy your next home. They can be extremely useful resources when used properly but extremely dangerous if used without understanding their functions. In this section we have going to discuss some common balloon mortgage loans.

A balloon mortgage is a mortgage that is payable in full after a certain period of time.

A balloon mortgage in today’s date is usually calculated on our 30 year, amortization schedule. Even though the repayment of the loan may be due in the next 5 to 10 years, there is some sort of a principal reduction because of this calculation. Assuming a rate of 6.5% on a $100,000 loan the balance remaining to be paid up at the end of a 5 year Balloon Mortgage would be $93,611.

Comparing a Balloon Mortgage to an ARM

The features available on an ARM can also be compared to balloon mortgage. What both these kind of mortgages have in common is that they offer low rate of interest during the initial years and a higher payment requirement after this initial duration is over. There are however differences between a balloon mortgage and an ARM. The one notable difference is that  balloon mortgage will require the prepayment of the complete loan after the initial duration is over. Whereas an ARM will only change its interest rate according to the prevailing index rates that it is tied to. A balloon mortgage requires the prepayment of the entire loan much before the terms of the mortgage paid as an ARM requires the repayment of the mortgage over the entire term of the mortgage. The following are some of the features that distinguish a balloon mortgage from an ARM.

Features of the balloon mortgage that make it advantageous as compared to an ARM

Balloon mortgages are simple to understand and easier to shop for.

The interest rate on a five years or seven year balloon mortgages typically lower than that on our 5/1 or 7/1 ARM.

Features favoring the ARM over a balloon mortgage

A balloon mortgage requires the complete repayment of the mortgage after the initial duration. It poses a higher risk of high interest rate if the prevailing rate for a refinance is substantially higher. An ARM is limited by rate caps.

Borrowers with a five or seven year balloon mortgage will incur refinancing costs whereas those holding and ARM 5/1 or 7/1 will not need to do so unless they choose to refinance.

It may be a problem trying to get refinance for balloon mortgage specially if the borrower has missed a payment in the previous year. The lender is under no obligation to refinance the mortgage and he might refuse. This will put a great burden on the borrower because he will need to repay the entire mortgage amount or become delinquent on the mortgage which might lead to foreclosure. This is not a problem with an ARM because it does not have to be refinanced.

A balloon mortgage contract allows lenders to decline to refinance if the current market rates are more than 5% higher than the rate on the balloon.