The Good, Bad and Ugly of Mortgage Bridge Loans
Mortgage bridge loans are to get you into the home you want now, but can’t afford because you haven’t sold your current home yet. The structure is a bit complicated, but if you found your dream home or just one heck of a deal that can’t wait, getting a little creative with the finances may be worth it.
The Good
The obvious good part of the mortgage bridge loans is it gets you what you want. When traditional financing says no, you can get a bridge loan to get that house you want now. An added bonus to going through the effort of bridge mortgage loans is you see how real estate investors work with banks on more complicated deals. You get to meet the bankers that make good risk reward decisions when lending money. If you are at all interested in real estate investing or running your own business meeting these contacts could come in real handy.
The Bad
The bad part of the bridge loan mortgage is the complexity of the situation. Essentially you are borrowing money on the equity in your home in order to put a down payment on the new home you want. Whichever lender you get to agree to do this will want in writing that they are the lender for your new mortgage as well. If they didn’t do this it would be possible for you to sell your house, buy the new house with a different lender, and not pay the mortgage bridge loans back. Without the lien on your new home they don’t have enough collateral to justify the risk.
When discussing the different bridge loan options you’ll especially need to look at the impacts of prepaid interest, and minimum payment requirements. Most are interest only payments until your house is paid off, but some bridge loans have automatic payment increases over time just in case your house can’t or won’t sell for a reasonable price.
The Ugly
The ugly part of mortgage bridge loans is the interest rate. For a secured loan at the start where your own a home, and a secured loan at the end because you are agreeing to give them the mortgage when the new house closes, banks charge a high interest rate for these loans. Plus they insist on six months interest up front. On top of that they usually only give you one year to pay the loan. So if something with your new house falls through you needs to find a way to make the payments really fast or you’re at risk of losing your original home. It’s definitely one of those situations where it’s wonderful when things go right, but it could become your worst nightmare if the other home sellers get edgy about your financing situation.
The most common recommendation for an alternative to mortgage bridge loans is borrowing from your 401k. I don’t recommend this because it ties you to your employer. If you want to quit or they fire you you’ll have to pay your whole loan at once or pay taxes on what your borrowed plus a 10% penalty.