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.