HELOC Bridge Loan

Bridge Loans

From time to time, we all find ourselves in spontaneous situations that we do not immediately know how to handle. When they involve significant expenses, our minds tend to fog up as panic becomes the dominating factor. Let’s say you need to relocate. After days and weeks of searching, you’ve found the new home of your dreams. You put in an offer in hopes of sealing the deal. There’s one problem though, you must sell your current home in order to receive enough funds to purchase the new one. Otherwise, this obstacle will result in the inability to afford those payments. I know that sounds terrifying. Believe it or not, there is actually a way that you’re able to  move out prior to selling your existing residence..even when a lack of finances stands in your way!

What is a Bridge Loan?

A Bridge Loan is a temporary loan used when the home-buyer does not have enough funds to purchase a new property without the prior sale of the first one. Typically, it’s valid for up to 1 year.  The equity in your current home would actually be used for the down payment on the purchase of a new home. With that being said, this type of loan helps you out for some time while you begin to secure the necessary finances. Therefore, you won’t have to make a purchase offer contingent on selling your home. You will be provided with more flexibility and time. 

What’s An Example?

Suppose you took out a bridge loan for 80% on your house that is worth $200,000. The loan would provide you with $160,000 because 200,000 x .8 = 160,000. Now you still have $100,000 remaining on your mortgage commitment as well. This money is used to help pay off that mortgage. Additionally, you will be given an additional $40,000 for the new property’s initial down payment. 

This can in fact be costly though, which is not beneficial in a situation like this. If a bridge loan in itself is not the best course of action for you, there are other options as well:

Home Equity Line of Credit (HELOC)

When purchasing that second home, you have the option to apply for a HELOC. A HELOC (home equity line of credit) allows you to borrow against the equity you’ve already built up in your current home. This permits you to pay off the line of credit once the property is sold rather than beforehand. Your mortgage lender will allow you to borrow an ”x” amount of dollars. That money will be paid back with low interest ONLY on the amount that’s drawn. You are able to use any desired amount from the credit line during this period. The draw period typically lasts 10 years and the repayment period is 20 years. 

Typically, if your down payment is less than 20% and you need to borrow funds, you will need to pay for mortgage insurance. For example, if a 15% down payment can be afforded,  the remaining 85% will be paid for with a mortgage, requiring mortgage insurance. When a “piggyback” mortgage is used, the loan isn’t structured the same way. For example, you use a 15% down payment, 70%  main mortgage and now a 15% “piggyback” second mortgage. With these numbers, the buyer is still borrowing 85%, but the main mortgage is 70%.  Piggyback loans provide total financing up to 97% of the property value and private mortgage insurance (PMI) does not have to be paid at all.