Are you worried about missing out on your dream home because your current house hasn’t sold yet? Well, bridge financing might just be the solution you need.

As its name suggests, bridge financing is a temporary loan that helps you “bridge the gap” when you’re buying and selling at the same time. It comes in handy when your closing date on your new home is sooner than your existing home.

Believe it or not, but being a first-time homebuyer actually has some perks. As a first-time homebuyer you don’t have to deal with the pressure of selling your existing home and buying a new property.

Buying and selling at the same time can be stressful – do you buy a home first and sell your existing home after, or do you do the opposite and sell first and buy a new home later?

In an ideal world you’d sell your home first and buy a home after, but things don’t always work out that way.

Not being flexible with your closing date could cost you your dream home. Unless you have thousands of dollars in savings you can use as a down payment, you’ll most likely need bridge financing.

Take the example of Tom and Ella a couple in their mid 40’s. They found the perfect luxury home in their dream neighbourhood. But they faced a big problem: their current house was still on the market. They needed to close the deal quickly or risk losing their new home to another buyer.

That’s where bridge financing stepped in! This short-term loan gave them the funds to secure their new property without waiting for their old one to sell.

With interim financing, they moved into their new place right away. Tom and Ella didn’t have to worry about temporary accommodations or missing out on that once-in-a-lifetime real estate opportunity.

Next up, let’s dive into what is & when exactly you might need bridge financing like they did.

What is Bridge Financing?

Bridge financing acts as a temporary loan that helps you buy a new home before selling your old one.

The main benefit is it provides the funds needed to secure your dream home without waiting for your current house sale to close.

This type of financing ensures you don’t miss out on a property due to timing issues between sales. It’s like having a financial bridge that takes you from one home to the next smoothly and quickly.

Why is Bridge Financing needed?

This gap between selling your home & buying a new one is what often leads to stress.

But what if you find your dream home before selling the old one? The timing doesn’t always work out.

Selling first, might leave you needing temporary housing which involves moving twice and other complications. But buying first can also be risky without the sale money from your old house.

Bridge financing steps in as a solution here. It lets you access funds for the new property while waiting on your sale proceeds. This way, you don’t lose that perfect home because of bad timing.

Plus, it avoids moving twice or rushing into selling at a lower price just for quick cash.

So when considering bridge financing, several situations necessitate its use:

For instance, in the case of buying a new home before selling your current one, bridge financing provides temporary funding to cover the gap between purchase and sale.

Similarly, when faced with long closing dates that don’t align with each other, bridge financing can offer short-term financial support. Furthermore, for individuals requiring transitional housing due to overlapping timelines during property transitions or those seeking interim financing while awaiting the completion of a home sale, bridge financing becomes necessary.

How much does Bridge Financing Cost?

When it comes to loans, typically the lower the risk, the lower the interest rate you’ll pay.

With bridge financing when the agreements of purchase and sale have already been signed on the properties you’re buying and selling, it’s just a matter of the funds changing hands before it’s a done deal.

With such a low risk, you’d expect bridge financing to be comparable to mortgage rates, but unfortunately that isn’t the case. In fact, bridge loans usually have a lot higher interest rate than mortgages.

More often than not, bridge loans usually have an interest rate comparable to a line of credit, usually two per cent above prime rate.

While nowhere near the interest you’ll pay on your credit card, it’s still more expensive than a HELOC (home equity line of credit).

Although the interest rate isn’t the lowest on the market, it’s important to remember that you’ll only need a bridge loan for probably 30 to 90 days until your deal closes, so the interest payments will end up being a small amount compared to what you gain. Also it’s important to remember that similarly to a HELOC, typically you’ll have to pay an administrative fee to your lender to set it up.

When compared to Home Equity Lines of Credit (HELOCs), bridge financing offers faster access to funds but at potentially higher interest rates. Understanding these factors allows you to make an informed decision based on your immediate financial needs and long-term goals in the real estate market.

Repayment options include interest-only payments during the bridge period, with the full loan amount due at the end when funds from the sale of the original home become available.

This financing option serves as temporary funding, ensuring a smooth transition without missing out on an ideal property or dealing with costly interim accommodations.

Alternatives to Bridge Financing

Explore alternatives like home equity lines of credit (HELOCs) to bridge financing. HELOCs offer flexibility with revolving credit and variable interest rates based on the prime rate.

While bridge financing is a short-term solution for buying and selling simultaneously, HELOCs provide ongoing access to funds by leveraging your home’s equity but may not be suitable for immediate large lump sum needs.

Compare differences between bridge loans and HELOCs. Bridge loans are designed for temporary transition periods, while HELOCs are ideal for ongoing or unpredictable funding needs.

Understanding these distinctions can help in making an informed decision about which option suits your specific financial situation better.

Is a Bridge Loan Secured?

As you may know, there are two types of loans, secured and unsecured.

Secured loans are backed by collateral, such as property or assets. Unsecured loans do not require collateral and rely on the borrower’s creditworthiness. Bridge loans are secured because they use the new home as collateral, reducing risk for lenders.

This security allows borrowers to access funds quickly and at potentially lower interest rates, providing a temporary solution during transitional periods in real estate transactions while mitigating risks for both parties involved in the loan agreement.

Bridge financing can offer homeowners an efficient way to manage short-term financial needs without hesitation or delay, minimizing stress associated with timing transitions until final property sales conclude.

And since bridge loans are secured by the equity in your current home, providing a lower risk for lenders and potentially better rates.

This added security can make bridge financing an attractive option for those looking to bridge the gap between buying and selling their homes.

This secured nature of bridge financing offers a win-win situation for both borrowers and lenders.

Ask Your Lender

If you’re in need of a bridge loan, be sure to let your lender know as soon as possible. Not only will you need to fill out the paperwork for your mortgage approval, you’ll need to complete additional paperwork for your bridge loan.

Not all lenders offer bridge financing – you don’t want to be left scrambling if your lender isn’t willing to help you out. Your real estate agent may have a close relationship with a lender who offers bridge financing, so it doesn’t hurt to ask.

Ensure open communication with your lenders at the earliest stage. Discuss available bridge financing options to find the best fit for your specific home transition needs.

Engaging in proactive conversations can provide valuable insights into potential costs and eligibility, setting you on the right path towards securing a suitable bridge loan.

Empower yourself by taking informed steps when considering bridge financing, ensuring a smoother process as you move closer to owning your dream home.

Therefore by discussing options early with your lenders, you can gain vital clarity and guidance for an effective financial strategy during this transitional phase and most importantly not miss out on moving in your dream home!