Bridge financing is a less common financing option, but it can be ideal for some buyers. Bridge financing is used when you have a firm sale agreement on your home and a firm purchase on a new home – but your new home closing date is sooner than the home they’re selling.
Bridge financing is a way to fill the gap between these closing dates.
What are the costs?
With bridge financing, the interest rate is similar to that of an open mortgage or a line of credit. Typically, lenders offering bridge financing also add an administration fee for arranging the bridge.
How long is a bridge?
When you obtain bridge financing, it only ever covers the period of time between the closing dates of the two homes. Most lenders only approve a bridge if the time in between is less than 90 days.
With a bridge, lenders will want to have a firm, subject-free sale agreement on your current home along with a firm subject-free purchase agreement on your future home.
How does it actually work?
The way the bridge works once you have the firm purchase agreements is:
You are purchasing a home worth $400,000 with 5% down payment ($400,000. X .05% = $20,000 down payment).
You are receiving $215,000 from the existing equity of your current home, which you will put into the new purchase.
$215,000 (Existing equity you are putting down on the new home) - $20,000 Down payment placed in trust = $195,000 Bridge financing amount.
When it comes to obtaining financing for a purchase, bridge financing might not be the least costly but it can be a good choice if you find your dream home before completing the sale of your current property. Remember, not all lenders allow bridge financing, so it is best to speak with a mortgage professional to determine your best options.