In this case, we are specifically talking about a home financing strategy known as “Bridge Financing“.
Bridge financing (or obtaining a Bridge Loan) is a type of lending used to finance the purchase of a replacement home while using the equity in your current home. Literally, this loan bridges the period of time (and the money needed) between the sale of the current home and the long-term refinance of the new one. In many cases both homes are leveraged to secure the purchase of the new one.
While it might sound easy enough, there is plenty of risk in this type of loan. We’ve listed a few of the risks below.
Bridge Loan Risks:
- The primary risk is you now have leveraged two homes. So, you’ll have a regular house payment and you’ll pay interest on the new loan. Consider how long can you pay both payments?
- Gyrations in the economy can and will impact your ability to sell your home. The longer it takes to sell the less you’ll make.
- Fluctuations in the long-term mortgage market will affect the ability to refinance and your monthly payment can go down or UP.
- Costs of maintaining two homes is more than you think it will be. Plan ahead and be prepared to pay for an extra period of time – the future is uncertain.
It’s always exciting to get a new home. But you must remember that sometimes your excitement can influence your better judgement. We encourage applicants to always consider the risks associated with any loan and we are more than happy to help you walk through that process.
If you have heard of “bridge financing” and have additional questions, please stop by one of our locations and we will be glad to visit with you.
To get a FREE long-term mortgage review and know for sure if a bridge loan, home refinance or new home purchase is right for your family – just click HERE , provide some basic information and we’ll be in touch!
Happy New Year!