Bridge Loans

For some home buyers, purchasing that new home involves selling an old one. That's why some borrowers look for a "bridge loan" to span the gap between the two transactions. Terms of a bridge loan can vary. Some are structured so that they completely pay off the old home's first mortgage, while others are in addition to the current mortgage. Steve Rogers at 630 202-9453 provides both types of bridge loan. Bridge Loans provide a convenient means for sellers to buy new homes before selling their existing homes, quickly granting loans up to 100% of the desired property’s market value.  These short term loans are often used to purchase a new home, and to close on a property quickly. 

There are two types of Bridge Loans.  The first option is to simply use the loan to pay off the mortgage on the borrower’s existing home and make a down payment on the new home.  That way, you only need to worry about paying the mortgage on the new home and will have the funds to repay the loan when the old home sells.  The other option is to borrow against the equity of the current home to use for the down payment—a far more complex scenario that results in a complex mathematical equation. 

By taking out a bridge loan, you will have more capital for a down payment and get better terms on your new home purchase.  Also, bridge loans allow you to invest quickly, thus beating other potential buyers to your preferred property. 

A Bridge Loan Works as Follows

A borrower takes out a bridge loan to pay off his existing mortgage and uses the remaining funds to make a down payment on the new home.  The borrower sells the home and uses the funds to repay the Bridge Loan.  If the home is sold within six months of being on the market, the borrower will be credited any unearned interest payments.  If the house is on the market for over six months, the borrower will make interest-only payments on the loan.  A bridge loan expires in a year and the borrower must employ the same lender to finance his new home.

Calculating Your Potential Credit

• Appraised Value of the Home x Percentage (up to 85%) – Balance Owed on Mortgage = Credit Limit

• The loan is used to pay off the existing mortgage, and the remaining money --     minus closing costs and six months prepaid interest -- is used as a down payment   on the new home.

• If, after six months, the old house still is not sold, the borrower will begin making interest-only payments on the loan

• The loan has a term of one-year.

• When you sell your current home, the bridge loan is paid off.

• If it is sold within the first six months, any unearned interest payments will be      credited to you.

• The mortgage on the new home must be financed by the same lender who          extended the bridge loan.

Home Equity Lines of Credit

A Home Equity Line of Credit uses the home as collateral when borrowing money.  This financing option is not a loan, but an open line of credit available to you to draw on whenever you need it that generally provides large amounts of money at low interest rates.  Usually providing certain tax benefits, the Home Equity Line of Credit provides easy access to funds.  Generally, lenders allow you to borrow up to 100% (depending on your credit situation) of your home’s value minus how much you owe on the mortgage.  Home Equity Credit Lines operate on a variable interest rate and are available over a set period of time.  After the allotted time has run out, some plans may demand that you repay the entire loan over another set time period while others allow you to renew the credit line.  When a borrower first takes out a line of credit, a lender often offers discounted interest rates for the first six months as incentive.   

Assumptions for your client ….

Current home $330,000 owe $200,000

New home $660,000

330,000 x .85 = 280,500 – 200,000 = 80,500   Subtract escrow approx 8,000 = 72,500

New home 660,000 – 528,000 first and a 59,500 second

When the old home sells, you would pay off second mortgage and pay down first mortgage.

Contact Steve for more details at 630 202-9453.