21. Mortgage Basics - Bridge Loan Basics

Bridge Loan Basics:

Sometimes buying a new house requires the selling of your old one. Bridge loans are a type of balloon loan that allows you to take a portion out of the equity of your old home before it sells, and use that money towards the purchase of your new home. The terms can vary with bridge loans, and while some allow you to completely pay off the mortgage of your old home first, others simply pile the new debt on top of the old.

Here are some typical guidelines for bridge loans:

• The loan has a one year term.

• The loan is used to pay off the existing mortgage, and the remaining money is used as a down payment on the new home.

• The borrower will begin to make interest-only payments on the loan if the house is not sold within six months.

• The bridge loan is paid off when you sell your existing home. If it is sold within the first six months, any unearned interest will be credited back to you.

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

Bridge loans often require a higher interest rate and origination fees, and careful consideration should be taken before obtaining one. Also, if your house does not sell quickly, you could find yourself scrambling to come up with money to pay two mortgages. An alternative might be to take the money from a 401(k) plan or take out loans secured by stocks or other assets.