June 7th, 2018 5:48 AM by Jackie A. Graves, President
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They can save
the day for homebuyers in a pinch, but people looking for a “bridge loan”
to span the gap between the sale of an old home and the purchase of a new one
should ask if the cost is worth it.
it almost never is, and people would be better off staying put until they’ve
unloaded their first residence. If that’s impossible, they warn, be prepared to
shoulder a heavy burden.
many sad stories about homeowners who took bridge loans, and our best advice
would be, ‘Don’t do it,'” says Richard Roll, president of the American
Homeowners Association in Stamford, Connecticut. “You can find yourself in a
totally untenable position, and you can lose your first house.”
is a bridge loan?
A bridge loan
is a short-term loan designed to provide financing during a transitionary
period – as in moving from one house to another. Homeowners faced with sudden
transitions, such as having to relocate for work, might prefer bridge loans to
more traditional mortgages.
loans aren’t a substitute for a mortgage. They’re typically used to purchase a
new home before selling your current home. Each loan is short-term, designed to
be repaid within 6 months to three years. And like mortgages, home equity
loans, and HELOCs, bridge loans are secured by your current home as collateral.
Terms can vary widely
tool used by movers in a bind, bridge loans vary widely in their terms, costs
and conditions. Some are structured so they completely pay off the old home’s
first mortgage at the bridge loan’s closing, while others pile the new debt on
top of the old. Borrowers also may encounter loans that deal differently with
interest. Some carry monthly payments, while others require either upfront or
end-of-the-term lump-sum interest payments.
share a handful of general characteristics, though. They usually run for
six-month terms and are secured by the borrower’s old home. A lender also
seldom extends a bridge loan unless the borrower agrees to finance the new
home’s mortgage with the same institution. As for rates, they accrue interest
at anywhere from the prime rate to prime plus 2 percent.
Norwest Corp. bridge loan, for example, would total $70,000 on a customer’s old
$100,000 home with $50,000 in mortgage debt outstanding, says Patty Stubbs,
branch operations supervisor for the company’s Des Moines, Iowa, mortgage
division. Of that, $50,000 would go toward the old house’s lien and a few
thousand would cover the bridge loan’s closing costs, origination charges and
fees, leaving the customer with about $16,000 for the new home’s down payment,
closing costs and fees.
example helps to show how the high fees associated with bridge loans can cause
problems. Norwest’s customer, for example, would end up paying between $2,000
and $3,000 for closing on the bridge loan, 1.5 percent to 2 percent of its
value for an origination fee, and another couple thousand dollars for closing
on the new home’s mortgage.
What if the sale goes sour?
estate market risks can exacerbate the danger, Roll says. For example, Norwest
and others are usually willing to extend bridge loans slightly beyond the
standard six months. But what happens to a homeowner who gets the financing and
extension, so the old home’s buyer can have a little more time, only to see the
transaction fall through?
say they need some of that money to buy their new house, so it’s predicated on
selling their old house,” Roll says. “What happens if they don’t sell that
house, or if the buyer doesn’t get financing?”
such a case, the lender could go as far as to foreclose on the old property
after the bridge loan extensions expired, Stubbs says, or a customer could deed
the property to the bank, which would sell it and apply the proceeds toward
paying off the loan.
Consider other options
those trying to stay away from bridge financing, borrowing against a 401(k)
plan or taking out loans secured by stocks, bonds or other assets are options,
says Kevin Hughes, a mortgage loan specialist at Cambridgeport Bank, based in
Cambridge, Massachusetts. Some lenders also offer hybrid mortgage products that
behave similarly to bridge loans.
example, a Cambridgeport customer with $50,000 equity on a $100,000 home, for
example, could obtain a combination first and second mortgage on a second
$100,000 home, Hughes says. Only one set of closing costs of about $1,300 would
be required, with about $184 in additional costs for the second mortgage.
part of the bank’s program, that person would make a $10,000 down payment on
the new property, which would have both a first mortgage for $50,000 and a
second for $40,000. Upon selling the old home, the borrower could use the
$50,000 worth of equity to simultaneously pay off the new home’s second
mortgage and recoup the money that covered the down payment.
equity loans are one of the most popular alternatives to bridge loans. Like a
bridge loan, they are secured loans using your current home as collateral. But
that’s where the similarities end.
equity loans borrow against available equity in your home. They are usually
long-term loans, and repayment periods can be anywhere from 5 to 20 years. If
you qualify, interest rates tend to be more favorable with home equity loans
than with bridge loans.
using a home equity loan to finance part of a new home purchase, such as the
down payment, can still be risky. If your original home fails to sell, you may
find yourself paying three loans: your original mortgage, your new mortgage,
and the home equity loan. We still recommend waiting until a deal closes on
your original property. But if you’ve built up sufficient equity in your
current home, a home equity loan may be a solid alternative to bridge loans.
Total debt climbs
a homeowner takes a bridge loan or a hybrid stand-in, however, a significant
amount of new debt will end up being added to the pile. The Cambridgeport
borrower, for instance, would have to make three payments each month in order
to cover the old home’s mortgage, and the first and second mortgages on the new
even though they aren’t the best deal, bridge loans or other short-term
mortgage financing products may be necessary when homebuyers land in tight
spots, lenders say. There will always be people relocating for work without
much advance notice, trying to keep others from beating them to the punch on a
property, or needing help with the expensive upfront costs of buying a new home
before their old one sells.
a way for the customer to get into that home without having to go through all
the gyrations of trying to get cash for a down payment,” says John Bollman, a
mortgage product manager with National City Corp. in Dayton, Ohio. “The
Realtors tend to use it as a tool to help buyers buy their home.”
loans nevertheless remain relatively obscure in a lending landscape dominated
by more widely publicized home equity loans and lines of credit. A
fast-churning real estate market also eases the demand because it shortens the
amount of time it takes for people to sell their homes, Hughes says.
for instance, said only 140 of the 240,122 mortgage loans it extended last year
were bridge loans, while Continental Savings Bank, based in Seattle, closes
just four bridge loans a month on average out of 775 total mortgages.
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