What is a mortgage bridge loan? This type of loan, also known as swing loan, is a valuable aid for those homeowners that are in the midst of two transactions – selling an old home and securing a new one. As the name suggests, mortgage bridge loan is used to bridge the gap between the purchase and sale transactions and aid the homeowner in paying off existing mortgage and making a down payment on the new one.
Mortgage bridge loan
Often selling the existing house and moving into the new one is not as seamless as one would like it to be. Typically a mortgage bridge loan involves borrowing to pay off the existing house mortgage and make the down payment on the new house. The mortgage bridge loan gets paid off when you sell the current house.
But it is essential that the new house mortgage is financed by the lender of the mortgage bridge loan. While some lenders of mortgage bridge loans lend a percentage of the equity built in your existing house, some others are willing to lend a percentage of the value of the current house after deducting the outstanding mortgage balance.
Mortgage bridge loans are possible only when there is sufficient equity in the existing property. Most mortgage bridge loans are offered for 6 months – 1 year. An open mortgage bridge loan is one where the existing house is already sold to a prospective buyer. On the other hand, an open mortgage bridge loan is given to homeowners whose current home is not yet on the market.
Repayment mortgage bridge loan
The mortgage bridge loan is repaid out of the proceeds of the sale of existing house. In the meanwhile, the interest in paid on the bridge loan. Often this interest is prepaid. If your house sells before the 6-month period, you may receive your interest back. Mortgage bridge loans are costlier than house mortgage loans on account of higher fees.
The interest rates on such bridge loans are slightly higher than average house mortgage loans. Keep on the lookout for any pre-payment penalties. Interest payments on mortgage bridge loans are tax deductible. But if your existing house does not sell as fast as you would expect it to, you are liable to make payments on two houses.
Such mortgage bridge loans are resorted to not only by homeowners but property developers too. Development of hotels, luxury residential condominiums and office buildings is aided with suitable high-leverage bridge loans to fill the equity gap. In such cases, often the bridge loan financing is as high as 90% of the cost of the project.