Your family is growing and you need more space, or perhaps you’ve just gotten that big promotion, and you’re anxious to move out of your small ‘starter’ home. Moving up from a first or second home into newer, bigger accommodations can be a challenging task in today’s markets. Often home-buyers have to commit to buying their new dream house before the one they currently live in sells. The financing can get complicated.
In this knowledge article from Diamond Estate Jewelry Buyers, we will cover the most common methods of obtaining a homeowner bridge loan, the risks involved, and an alternative method for short term financing that you may have overlooked but which could be the easiest, quickest, and most viable option.
What is a Homeowner Bridge Loan?
A homeowner “bridge loan” is a generic term for a short-term loan taken out by a homeowner against their current property to finance the purchase of a new home. Bridge loans are generally used when a borrower is moving into a bigger, more expensive house, and their current house hasn’t yet sold. A bridge loan actually ‘bridges the gap’ between the time when the new house is purchased and the old one sells. When markets are booming and houses sell quickly, it’s not usually necessary to take out a bridge loan. But in today’s sluggish housing market more and more homebuyers find themselves in need of this short term financing option.
“Wrap” or “Gap” Financing
One type of bridge loan, sometimes called “wrap” or “gap” financing, is a short-term loan that wraps the payments for your current home and your next home into one loan. You borrow enough money to pay off your existing mortgage and provide for a down payment on your new home, though technically, some borrowers will actually own two houses at once. To qualify for this type of loan, you must have excellent credit and significant home equity, (the difference between what your current home’s market value is and how much you still owe on it).
Typically, you can only finance up to 80 percent of the combined value of both homes, resulting in the need for significant equity, a big down payment, or a combination of the two. If you are selling a house for $200,000 and buying one for $350,000, you can borrow only $440,000, leaving $110,00 to be made up with equity and down payment. And because the lender may have to qualify the buyer to own two homes, many prospective buyers will not meet the borrowing requirements.
With this type of loan, you generally will not make any monthly payments on the loan itself. Instead, you will make mortgage payments on your new home. When your old home sells, you will use the proceeds to pay off the bridge loan, including the associated interest and remaining balance. You then need to apply for a new mortgage, meaning that you would pay closing costs twice.
Home Equity Line of Credit
Another type of bridge loan is actually a kind of second mortgage. If you have enough equity in your home, (at least 20 percent), you may qualify for a Home Equity Line of Credit (HELOC) that you can use to make the down payment and initial payments on your new home’s mortgage. When you sell your old home, you pay off the line of credit and your old mortgage. The limit of a HELOC is set by the lender, and you can withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again. For instance, if you have a $10,000 line of credit and borrow $5,000, but then pay back $3,000, you still have $8,000 available. This flexibility can be quite useful if your old home doesn’t sell for many months.
The Risk and Cost of Homeowner Bridge Loans
Bridge loans from today’s banking institutions can be risky, whichever type you decide on. As the borrower, you will be taking on a new loan with a higher interest rate with no guarantee that your old property will sell within the allotted time frame. Bridge loans have a set time limit, with due-and-payable dates that are set by the lender. This means that if your old home is not sold by that time, you will need to ask for an extension or completely refinance your debts.
Bank issued bridge loans often come with hidden fees and penalties that the homeowner overlooks or doesn’t consider fully. Keep in mind that in addition to higher interest rates than a typical 30-year, fixed-rate mortgage, banks also attach fees that are generally higher than more conventional loans. For example, many lenders charge in excess of 1 percent of the outstanding loan balance as a fee. There can also be significant penalties for prepayments–that is, if you pay off your loan faster than agreed.
Some lenders will not consider extending a HELOC (Home Equity Line of Credit) if they know the house will be going on the market, so you’ll need to secure the loan before you list your home for sale. In addition, you will have to qualify for the payments on the home equity line of credit, your current home loan, and your next mortgage. Credit lines also usually have variable interest rates that fluctuate over the life of the loan as well. Payments will vary depending on both the interest rate and how much credit you have used.
Other Options for a Homeowner Bridge Loan
Due to the complexity, hidden fees, and strict qualification requirements involved in traditional bridge loans, many people are seeking alternative short-term financing options–such as financing down payments with their 401k, stocks, or other assets. However, tapping into your retirement fund or emergency savings is usually not a good idea.
For many homeowners, the easiest and quickest financing method is to secure a short-term collateral loan with portable luxury assets, such as old diamond jewelry, luxury timepieces, or gold coins. Depending on the value of your items and the amount of financing needed, a collateral loan often can help ‘bridge the gap’ in financing your new home.
At Diamond Estate Jewelry Buyers, we’ve helped many homeowners secure confidential short-term collateral loans, regardless of their credit history and without putting their current credit rating at risk (as no credit checks or reports are ever made). Our collateral loan specialists are available to evaluate your fine jewelry or timepiece and issue you an immediate bridge loan today. Contact us now for a free loan consultation.
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Would you like more information about Diamond Estate Jewelry Buyers? Please click on the following link to learn why we are recognized as the best way to obtain a collateral loan for luxury assets and: The Best Place to Sell Jewelry.
Are you a first time home buyer? Read our article: How to Get Money for a Downpayment on a House