Sometimes when you buy a new home and sell your existing one the closing dates don’t line up.
When this happens, how do you pay for your new abode if you don’t yet have the money from the sale of your current one?
The answer: bridge financing.
A bridge loan works exactly the way it sounds — it bridges the gap between the two deals. The temporary form of financing allows you to use the equity in your current home for the down payment on your next property while you wait for the sale to close.
This type of loan is especially helpful in a hot real estate market where bidding wars are the norm. It means you can be flexible with the closing date and meet the seller’s demand in this regard. When you do sell, you can then use the money to pay off the bridge loan and interest.
Typically, interest is more expensive than conventional financing, often costing you the prime rate plus 2% to 4% from the big banks. (Bridge loan interest rates are higher if dealing with a ‘B’ or private lender.) Many lenders also charge an administration fee, which can be several hundreds of dollars.
Bridge loan terms can be for a single day up to generally four months, though every financial institution (and case) is different. To qualify, you must have a firm Agreement of Purchase and Sale in hand for your current property before your new purchase closes.