“How exactly does bridge financing work?” asks Claire from Oakville
March 3rd, 2008 Categories: First Time Buyers, Investing in Real Estate, Mortgages, Economics, Finance, Oakville Real Estate News
I was showing homes a few days ago to a nice lady named Claire who asked me a question: “How exactly does a bridge work?” She had been a senior bank employee and wanted to know how the numbers worked.
First let me explain why bridge financing may be necessary.
Imagine you’re looking for your next home, and walk into the place of your dreams. The space is tailor-made, the location is perfect, even the price is right. Just one problem: the owner of your dream home has to close the deal within the month, and you can’t sell your current home that quickly. How can you come up with the money to buy the new place, while carrying the old one?
Bridge financing could be your best way to seal the deal. This type of financing is a hefty short-term loan that bridges you over the period when you own and are paying for two homes.
To obtain bridge financing, you have to present your financial institution with two firm offers – one for your current house and one for your next home. You obtain a new mortgage on the new home and carry the two mortgages during the overlap period, before the sale of your current home closes.
Once that happens, you use the proceeds of the sale to pay off the bridge loan, plus interest and costs. Alternatively, you can arrange to repay the bridge loan in six months to a year. This may be useful if you need to save a bit to pay off the bridge in full.
Trouble is, the costs of bridge financing can really add up:
- interest on this type of short-term loan is relatively high, usually the prime rate plus two to five percent.
Set-up fees can be hundreds of dollars - worst-case scenario: the deal for your old home falls apart at the last minute. If that home is collateral for the bridge loan, the bank could seize it
The bottom line is you should only consider a bridge loan if you can afford the interest charges and can pay it off in full as soon as possible. With this type of financing, every single extra day can cost you hundreds or even thousands of dollars.
Having said that, if it is for a few days or you can afford it easily, it is a convenient way to deal with closings that don’t match up exactly.
I attended a mortgage financing seminar recently where the speaker gave the following example:
Hope this helps to clarify things. Best bet is to talk to your REALTOR, bank or mortgage broker before you go out househunting if you think you may want to utilize bridge financing.
CALL HILARY AT 905–599–3311 TO GO LOOKING FOR THAT DREAM HOME!
This entry was posted on Monday, March 3rd, 2008 at 8:04 pm and is filed under First Time Buyers, Investing in Real Estate, Mortgages, Economics, Finance, Oakville Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.