BRIDGE LOANS

When do you need a bridge loan? Let's say you're out looking at new homes, and you find one that you absolutely love. The sellers want to move the house quickly. Problem is, your current house hasn't sold yet. Or maybe you haven't even put it on the market.

You could make the sellers of the new home an offer that's contingent upon you selling your existing home. However, sellers usually don't like contingency clauses in an offer. They'd rather do a clean sale. You could wind up not getting the house you love.

So, what do you do?

One option is a bridge loan, also known as "swing loan" or a "gap loan."

A bridge loan enables you to carry the mortgage on your existing home and take on a mortgage on the new home.

Bridge loan risks:

Bridge loans are not without risk. You're assuming that your existing house is going to sell within the length of time specified in the bridge loan contract. If your home doesn't sell, you're going to have to scramble to get another loan.

Bridge loans are also more expensive than traditional mortgages. Bridge loans generally have higher interest rates and fees.

There are two types of bridge loans. The first allows you to borrow enough money to pay off the mortgage on your existing home as well as sufficient money to make a down payment on your new home.

With this type of bridge loan, you generally don't make payments on the bridge loan. You only make the normal monthly payments on the mortgage on your new home. Then, once your existing home is sold, you pay back all of the accrued interest and the outstanding balance on the bridge loan.

The second type of bridge loan involves more risk, as you're essentially carrying three mortgages at once.

With this type of bridge loan, you continue to make your monthly payments on your existing home. You borrow the money for the down payment on your new home with the bridge loan, and then make monthly mortgage payments on your new home. You don't make monthly payments on the bridge loan, but instead pay the outstanding balance and accrued interest when your existing home is sold.

Not everyone can afford to make two mortgage payments at once. If your financial situation isn't strong, you likely will be turned down for a bridge loan by the lender.

Just as with any other type of loan, different lenders will have different terms and conditions. Some lenders will let you borrow a certain percentage of the full market value of your existing home, less the outstanding balance. Other lenders will be more strict, and will only let you borrow a percentage of the actual equity that you have in your existing home.

You stand the best chance of getting the best deal on a bridge loan by using the same lender for both the bridge loan as well as the mortgage on your new home.

As with any type of loan, it's important that you examine all of the fees and terms carefully, and that you shop around. Most bridge loans are meant to be paid in six months, so it's important that you check to see how long homes are sitting on the market in your area. If home sales are lagging, make sure that there's a clause in the bridge loan contract that will allow you to renogotiate to extend the loan if your existing home doesn't sell before the bridge loan comes due.

There are alternatives to bridge loans. You can borrow against your 401k to get the money for the down payment on your new home. Actually, you can borrow against anything that is secured, even a car. You can also get a home equity loan on your existing home to get the money for a down payment on the new home. With any of these scenarios, though, you'll still be making the mortgage payments on your existing home, on your new home, plus making payments on the money you borrowed for the down payment.

If you think you want to buy a new home, plan ahead. Get your existing home ready to sell, and perhaps even get it on the market. Life is complicated enough without having to worry about carrying two or three mortgages.