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If you are thinking of moving to a new home but have a lot of your money tied up in the equity of your current residence, you don’t have to feel paralyzed. Before you panic, lose hope or dip into your hard-earned savings, you might want to consider bridge loan options. A bridge loan is defined as a sum of money lent by a bank to cover an interval between two transactions — in this case, the buying of one house and the selling of another.
There are several ways to finance or leverage the equity you’ve built and hold in your current residence in order to achieve your goal of buying a new home.
You can finance up to 100% of the purchase price of your new home.
Banks that offer this financing may be able to offer you a new first mortgage for 80% of the purchase price and then a home equity line of credit for the remaining 20%. Once you sell your current home, you can take the proceeds and pay down the home equity line — and still have it to use for up 10 years.
You can pull the equity out of your current home with a home equity line of credit.
This option would allow you to have a line of credit to use as you wish for the new home purchase. There are lenders that offer no closing cost lines, but require you to keep the line open for two years in order to avoid paying penalties. If you are not sure that you are going to sell your primary residence now but still want the flexibility of accessing your equity, lenders may finance up to 90% or more of the value of your home.
You can use the equity in your current home as collateral for a new home.
Some lenders will allow you to use your current — or any other — residence as back-up collateral for a new purchase. These banks may grant one new mortgage for up to 100% or more of the purchase price of your new home, as well as loan you additional funds for renovation, moving or anything else you want. This type of loan typically offers the best rates overall because the entire loan can be granted with first mortgage rates and not the higher rates associated with home equity loans.
Of course, bridge loans are not right for everyone. These types of loans generally require strong credit, stable finances and low debt-to-income ratios. Moreover, if your current home does not sell by the time you need to start repaying your bridge loan, you are still on the hook for the debt. The worst-case scenario is you might be paying down three loans: two mortgages and the bridge loan.
As always, it is best to seek professional advice from an experienced mortgage broker to help you sort through the best option for your specific situation. In most cases, bridge loans can help bridge the gap between the home you have and the home you’re aspiring to buy.