Don’t burn your bridges. Understanding bridge financing.
What are bridge loans ?
Bridge loans are short-term loans that clients use when they have two different closing dates for the sale of their existing home and the purchase of their new home. Bridge loans are becoming increasingly popular as people prefer to have a few days to a few weeks to move or to prepare their new home before they move in (paint, renovate, clean etc). It relieves many of the stresses of having to move out of one home into another on the same day and living in chaos until they make their new home a home.
In the past, many homebuyers would coordinate their selling and purchase dates to be on the same day. They would pack up the moving truck, have it unloaded, kids, dog and all in a timespan of a day. And yes, it is doable and many people still do it although some people attest to it being one of the most stressful days of their lives.
Today there are options available that allow clients a little more leeway when it comes to moving day. Bridge loans are become increasingly popular. Sometimes buyers choose to allow 3-4 days between closings and sometimes they request 3-4 weeks to prepare their new home.
Here’s an example of how Bridge Financing Works and the costs involved.
A couple sold their home for $500,000. Closing is on January 15. They are required to pay out an existing mortgage of $200,000 leaving them with $300,000 after their home closes.
These clients bought a new home for $600,000. They have been approved for a mortgage of $400,000 on the new home. They opted for a later closing of January 30 so they can paint their home.
Since their new home’s closing is 2 weeks after they receive the proceeds of the sale, they will not have the money available for the downpayment. This is where the bridge loan comes in.
- Bridge loan required is $200,000… Basically, this is the downpayment amount (Purchase price minus mortgage amount approved)
- Clients will be charged an administrative fee by the lender (usually ranges from $250 – $500)
- They will also be charged interest for the 15 days of the bridge loan. This varies but some of our lenders charge prime (currently 2.7%) + 2% which would mean that the daily interest on $200,000 would be around $25.75 daily interest.
Total cost of bridge loan in this scenario for the $200,000 for the 15 days would be $650 – $900 excluding legal fees. (interest rates and fees vary from lender to lender)
Keep in mind:
- To qualify for a bridge loan, you must have a firm Purchase and Sale agreement for the sale of your home.
- Not all banks and lenders offer bridge loans. Sometimes if a bridge loan is absolutely needed due to your buyer or vendor’s requirements, Private lenders may be able to help. This can be considerably more expensive than a bridge loan with a bank so changing the closing date may need to be a consideration first.
Bottom line is that bridge loans are convenient ways to give you a few extra days or weeks to prepare your property before you move in. They do come at a cost – It’s important to talk to your mortgage broker beforehand to discuss your options and see if this is the way to go.