Bridge financing is not as common as other financing, but can be ideal for some buyers and in fact necessary. It is used when your new home closing date is sooner than the closing date on the home you are selling. In order to access bridge financing you need to have a firm sale agreement on your home and a firm purchase agreement on a new home.
Bridge financing is a way to fill the gap between these closing dates.
What are the costs?
The interest rate with bridge financing is typically higher than the rate you will receive on your mortgage and the lender will likely add an administration fee for arranging the bridge loan.
How long is a bridge?
Generally lenders will only approve bridge financing if the two closing dates are within 90 days of each other and the bridge financing only covers the period between the two dates.
With a bridge, lenders will want to have a firm, subject-free sale agreement on your current home along with a firm subject-free purchase agreement on your future home.
How does it actually work? The way the bridge works once you have the firm purchase agreements is: Scenario You are purchasing a home worth $400,000 with 5% down payment ($400,000. X .05% = $20,000 down payment). You are receiving $215,000 from the existing equity of your current home, which you will put into the new purchase. $215,000 (Existing equity you are putting down on the new home) - $20,000 Down payment placed in trust = $195,000 Bridge financing amount. Bridge financing can seem costly, but it might be necessary if you find the home of your dreams before you have finalized the sale of your existing property. Also not every lender provides bridge financing so it is essential to speak with your mortgage professional early in the process to determine your best options.