Assume a situation where you are intended to buy a new property using mortgage, and you need to dispose of your existing property to finance the down payment of your new mortgage. However, it is a real matter of concern when the dates of both transactions do not fall on the same day. At such a situation, you would require a short-term credit that could cover the difference between these dates.
Not all banks or private lenders offer bridge loan, however you could find one using the services of a mortgage broker. Most of the time, a bridge loan is offered for not more than one month, while the criteria is not that hard to qualify. The interest rate charged on a bridge loan is usually higher than the standard rates with an addition of 3% to 4% to the current market rate.
Let us suppose that you have been offered to sell your existing property at a specified price. On the other hand, you are planning to use the proceeds of your sale to cover the down payment of your next mortgage. The date of receiving the amount against your sold property is scheduled on August 18. However, you are required to finalize your purchase a few days prior to August 18, let it be August 01. The best solution to this scenario is to take up a short term bridge loan.
|Sale of Existing Property||August 18|
|Outstanding Mortgage Amount||$310,000|
|Purchase of New Property||August 01|
|New Mortgage Amount||$420,000|
|New Down Payment||$130,000|
|Bridge Loan Amount||$130,000|
|Bridge Loan Interest Rate||6%|
|Bridge Loan Cost for 18 days||$385|
In the above stated example, you could get a short term loan at a cost of $385 to settle the new purchase. You can then pay the amount back to your lender, once you receive the net proceeds from the sale of your property.
In some cases, borrowers are provided with a bridge loan from the same lender who is carrying your next mortgage.