Sometimes life sneaks up on you. You weren't expecting that fantastic job opportunity, and you certainly weren't expecting to transfer out of state. Suddenly, without warning, you find yourself in the position of having to find a home in a new place, and you haven't sold the one you're in. How do you manage that balancing act?

Our real estate agents may suggest you consider a bridge loan. But what is that, exactly? Essentially, it is a short-term loan backed by the equity in your existing home that will allow you to cover the time gap between its sale and the purchase of a new house. That may seem simple enough, but the borrower needs to understand this complex transaction with many ins and outs. 

Pros of a Bridge Loan

• You can make an offer on a property you like without waiting for your house to sell. You don't have to buy on contingency. 
• You won't incur a long-term commitment to additional debt. A bridge loan is typically for six months to a year. 
• You can get the cash quickly to help you through a sudden need to relocate. Bridge loans generally close much faster than other borrowing options. 
• You may be able to make lower payments. You may obtain an interest-only payment option or even a deferred payment plan. Of course, you will need to keep in mind that you will eventually have to pay back the entire principle, which will take a bite out of the profits from selling your existing home. 

Cons of a Bridge Loan

• Most lenders require the seller to have at least 20% equity in the home and cap the loan amount at 80% of the combined value of the two properties. Not all sellers, even those with good credit, will qualify. 
• Bridge loans charge higher interest rates because of their short-term nature. High rates mean the lender makes money on short-term loans.
• Bridge loans include closing costs and fees just like a traditional mortgage. These include origination, appraisal, escrow, and possibly more. 
• You may have trouble selling your house. Even in times of seller's markets, sales can fall through, leaving you with two mortgages and a lot of headaches. 

Other Options

• A home equity loan will still allow you to tap into the equity in your existing house without the urgency of a quick sale. You may still find yourself holding multiple mortgages, but you will have more time to pay back the loans and a lower interest rate. 
• A home equity line of credit, or HELOC, will generally mean a lower interest rate and fewer limitations on the use of the funds. You can, for example, use part of the money to make repairs necessary for the sale. You will still enjoy more time to repay the loan as you would with a home equity loan. There may be associated prepayment fees.
• You may prefer an 80-10-10 loan. You would make a 10% down payment on the new property, take out the first mortgage for 80% of the cost, then a second mortgage for the remaining 10%. When your first home sells, you can use part of the proceeds to pay off the second mortgage. 

Are you ready to shop for one of our lovely Berlin homes for sale now that you're armed with this new financing information? Contact us when you are ready to take the next step.