What is a Bridge Loan?

 

Bridge Loan Article

The Merriam-Webster dictionary defines a Bridge Loan as: a short-term loan used to finance an enterprise, investment, or government pending the receipt of other funds.

I explain to my customers that a Bridge Loan essentially transfers available equity from your current residence to be used as a down payment, or partial down payment, on the property you wish to purchase without having to sell your existing home first.

The Bridge Loan scenario goes something like this:

You have decided that you’ve outgrown the home you’re currently living in and want to purchase or build a larger one. You’re excited about the possibilities until you realize you do not have a large sum of money saved for a down payment. Before you decide that upgrading to a new home isn’t a possibility, take a look at the equity you’ve built in your current home. If there is enough equity to cover the down payment for the purchase or construction of a new home, you have a few options to liquidate that equity, such as:Bridge loan meaning

  • Selling your home first.
    While this is always an option, it’s rarely one most folks elect to do when building a home. You would have to find somewhere to live during construction, move twice, pay to store household goods until your new home is complete, find short-term rental options, find landlords who will accept pets, etc.
  • Securing a Home Equity Line of Credit.
    This can be a good option if you already have an established line of credit in place. However, most lenders won’t approve a new line if they know you will soon be selling the property. Plus, this would add another payment to your monthly debt obligations.
  • Utilizing a Bridge Loan.
    This is an interest-only loan (so your monthly debt obligations are lowered) and allows you to live in your current home while your new home is under construction. With some Bridge Loan products, you’ll have only one interest-only payment versus multiple payments with a Home Equity Line of Credit.

How does a Bridge Loan work?

Bridge Loans are usually limited to owner-occupied residential properties, so assuming you live in the house you intend to sell, a bank will generally lend you money against the value of the home. In most cases, that value is limited to 90% of the appraised value.

Here is a quick illustration:

  • If the appraised value of your home is $200,000, the bank would lend you up to $180,000, which is 90% of the value ($200,000 x .90 = $180,000).
  • Now subtract your current mortgage balance. For easy math, let’s say you owe $100,000, so subtracting that from the $180,000 value leaves you with $80,000 of available equity to be used as a down payment for the purchase or construction of your new home.

It’s also important to note that there are some additional costs associated with Bridge Loans. First, your lender will order an appraisal to determine the current value of your home. Second, if you have outstanding mortgages, they will be paid off and transferred to the Bridge Loan. Lastly, you may incur a higher interest rate on the Bridge Loan (compared to your current mortgage), but keep in mind that a Bridge Loan is a short-term loan used only for the few months that it takes to sell your current home. This increased interest does not typically amount to a sizable difference between your previous mortgage and the Bridge Loan.

Final Thoughts

There are many types of Bridge Loans. Be sure to speak with your mortgage lender to discuss different options and determine which is the best product for you. You may be able to combine your current mortgage and the new purchase or construction loan into one Bridge Loan. Or, you could discover that you have enough equity in your current home to pay for your new home outright. No matter what your situation is, a Bridge Loan can be a great tool when used correctly and strategically to help you purchase or build your new home.

 

Scott Hart
Senior Sales Manager
Waukesha State Bank
NMLS #526247

 

Scott Hart joined the Waukesha State Bank Mortgage Team in 2015 as the Assistant Manager and Sales Trainer and was promoted to Senior Sales Manager in January of 2017. He has been in the industry since 1997 where he’s worked side-by-side with top real estate brokers, developers and new home construction professionals throughout the Waukesha County and greater Milwaukee area.

Scott has been selected as Milwaukee Magazine’s Five Star Mortgage Professional every year since 2011, has been named a President’s Club Award recipient from 2004 to 2012, and was nominated as the MBA Lender of the Year in both 1999 and 2000.

This article is for educational purposes only and is not intended to be a promotional advertisement or to solicit business.