A bridge loan is a short-term loan that you give yourself. You are borrowing money against your existing home’s sale to facilitate the down payment on the home you are purchasing.
Bridging is a tool that helps you “bridge” the gap between the old and the new mortgage when you move from one home to another.
You may want to take possession of your new home a week or so in advance of the closing of your current home. Bridging is a great option to exercise. It allows you to move into your new home in advance, letting you paint, clean, do minor renovations, whatever your imagination will allow.
Here’s what you need to know:
Bridging is for a specific amount of money. Financially it’s the down payment, plus the closing costs, less the deposit. For example, if your new home’s down payment is $32,000, the closing costs $3000.00, and you provided your realtor with a deposit of $5000.00, you will need a bridge loan of $30,000.00.
Down payment $32,000.00 + closing costs $3000.00 – the deposit $5000.00 = $30,000.00 bridge request
Bridging is not a long-term strategy; bridge financing is meant for a short designated period of time. Typically a few days to a couple of months.
Your lender will need a firm sale agreement for your existing home. A firm sale means any and all conditions (inspections, financing, etc…) have been waived, and the house is firmly sold.
Not all lenders offer bridge loans. Since we are working together, I am happy to organize a new mortgage and bridge loan combination, even if it’s not with the same lender.
Convenience has a price, and well worth it if you ask me. What’s the cost, you ask? I typically advise clients to budget approximately $600.00.
Let’s look at the example of someone needing a $30,000.00 bridge loan; what will it cost?
The math: $30,000.00 bridge loan x Prime 2.45% today + 3% = 5.45% = $30,000.00 x 5.45% / 365 x the number of days you need the bridge for, let’s say seven days.
$30,000 x 5.45% = $1635.00 / 365 = $4.48 a day x 7 days = $31.35 in interest charges for the bridge financing. This is why lenders charge an administration fee, typically $350.00. So in this example, the total cost for one week is $381.36
Your lawyer will pay the bridge loan from the proceeds of the sale of your existing home on the closing day. Should the sale of your current home fall apart for some reason, your lawyer will register the bridge loan against your property.
Bridge financing is your short-term best friend: making it possible to transition from the old to the new easily.
If this blog is as clear as mud, call me. I am here to clarity, educate, and support you throughout the process. You may only apply for a mortgage a few times in a lifetime; I process mortgages several times a day. Lean on me.