How Does Bridging Work?

elitere | Sep. 12, 2021

Source: TLC Mortgage Group – Jim Steffler

We receive a lot of questions about bridge financing, so here is an update to explain the basics. It’s best illustrated with an example:

A Client buys a $700,000 home closing on September 1st and wants to put $200,000 as a down payment using the equity in their current home. They will need a new $500,000 mortgage. 

Their current house sold for $500,000 and closes on October 1st. They currently have a $250,000 mortgage which they will be paying off and will be using the remaining $250,000 in equity for the $200,000 down payment, taxes, lawyers fees, and paying their real estate agent a full 5%. 

Here’s how their finances will look on September 1st when their new home closes. Essentially, they will have 3 mortgages/loans:

  1. Their current mortgage for $250,000 will continue until October 1st (when their old house sells).
  2. Their new mortgage for $500,000 will begin.
  3. The “bridge” loan is simply $200,000 for the down payment and will be a one-month loan which is repaid with interest from the proceeds of the sale on October 1st.

Some bridge basics:

  • The cost all depends on the amount of the down payment (the higher the down payment, the more expensive the bridge), and the amount of time the bridge is needed for. Generally speaking, most bridges cost around $1500-$2000.
  • Interest rates on a bridge are typically around 6.45%, with an approximate $350 set-up fee, and then charges for the lawyer registering it. These charges vary by lender and situation.
  • No payments are made on the bridge loan, even if it is for longer than one month. 
  • With many buyers being blended families now, and using the sale of two homes for the down payment, make sure only one bridge loan is needed. Two is a nightmare and is typically not approved.
  • Not all lenders offer bridge financing, and even some that do have specific low-rate products where bridging is not possible. Make sure your client checks that they will be able to get a bridge loan with their mortgage broker or bank.
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