“Mortgage bridge” loans may be ideal for homeowners wishing to purchase a new home before they’ve sold–or paid off–the old one. Mortgage bridge loans allow homeowners to borrow against the value of their current home in order to secure the second.
With a mortgage bridge loan, homeowners can borrow up to 85 percent of the value of the current home, plus the funds needed to secure the second. For instance, say the current home is worth $150,000. Our borrower, Joanna Smith, has found the second home she wants, which costs $200,000, but she still owes $100,000 on the first one. In order to move now, Joanna needs to come up with $300,000.
Using a mortgage bridge loan, Joanna could qualify for $125,000 on the first house (85 percent of its value, leaving Joanna with $27,000 in equity) plus$170,000 for the second (also 85 percent, leaving a $30,000 balance). In order to cover this $30,000, Joanna can apply the $27,000 still remaining in equity on the first home, leaving just a $3,000 balance. After all is said and done, Joanna only needs $3,000 in actual cash to make up the difference.
During the time Joanna technically owns two homes, she is responsible only for making interest payments. Upon the sale of the first house, that portion of the bridge loan is immediately repaid, leaving Joanna responsible only for the mortgage on the second house. The danger here, of course, is that Joanna’s first home may not sell. Mortgage bridge loans can be a clever tool, but borrowers must be sure to understand all the potential risks involved.