For some home buyers, purchasing that new home involves selling an old one. That's why some
borrowers look for a "bridge loan" to span the gap between the two transactions.
Terms of a bridge loan can vary. Some are structured so that they completely pay off the old
home's first mortgage, while others pile the new debt on top of the old.
A typical bridge loan might be structured as follows:
- The loan is used to pay off the existing mortgage, and the remaining money -- minus
closing costs and six months prepaid interest -- is used as a down payment on the new
home.
- If, after six months, the old house still is not sold, the borrower will begin making
interest-only payments on the loan
- The loan has a term of one-year.
- When you sell your current home, the bridge loan is paid off. If it is sold within the
first six months, any unearned interest payments will be credited to you.
- The mortgage on the new home must be financed by the same lender who extended the bridge
loan.
Tip
Bridge loans are costly because of high fees. You might consider other financing such as
borrowing against a 401(k) plan or taking out loans secured by stocks or other assets.
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