Bridge Loans Avoid Two House Payments

You are moving, and you have found your dream home. The contract is signed, and you have to close in 30 days. The problem -

your old house is up for sale and getting very little interest. You are a nervous wreck, because you have to close a loan on your new home, and you are looking at two mortgage payments. Relax, this one is easy. Simply get a bridge loan.

A bridge loan is very much like an equity loan, one that "bridges" the gap in the time you move into a new home and sell your old one. The only catch here is that most lenders will only loan up to 80% of the value of your old home, so if you haven't been there long and have little equity, you'll need a different approach. Let's assume your home is worth $100,000 and you owe $80,000 on the mortgage. You take a bridge loan for the $80,000, and pay off the mortgage on your old house.

Now, I'm sure you're saying, "What good does this do me? I still have two loans, the bridge and the mortgage on my new home." You're right, but here's the catch. Unlike your mortgage, which probably carried a payment on an original loan amount of more than $80,000, with a principal and interest payment, including the taxes and insurance. The bridge loan requires interest only payments, usually at the Prime interest rate, say 4.25%. So, this payment would be $283, and the best news is that the bank will defer payment on the loan for up to 90 days. Now, you have no payment on your old house, and three months of breathing room to sell. If you sell, before your bridge payments begin, simply use the money from the sale to pay off your bridge loan, and you basically got $80,000 for no more than the cost of closing the loan (a few hundred bucks).

Incidentally, if you don't have enough equity to get a bridge loan, ask your mortgage professional to set up the loan on your new home, so the first payment is delayed for a few months. This can be done by simply having the lender add more prepaid interest into the loan, meaning you're really making the first few payments, but you are financing them. This is certainly not a routine move by a lender, but it can be done; I've done it myself on a house I purchased.

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