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WHAT IS BRIDGE FINANCING FOR A MORTGAGE

If you're in the process of buying a new home, you may have heard the term "bridge financing" thrown around. But what exactly is bridge financing for a mortgage, and how can it help you in your home-buying journey?

Bridge financing is a short-term loan that helps bridge the gap between the purchase of a new home and the sale of your current home. It is typically used by homebuyers who are in the process of selling their current home and need funds to purchase a new one. It allows you to access the equity in your old home to use as a down payment on your new home.



How Does Bridge Financing Work?

It is structured as a short-term second mortgage on your current home, based on the equity you have in your current home. Which is the difference between the current market value of your home and the amount you still owe on your mortgage.

For example, if your current home is worth $500,000 and you still owe $300,000 on your mortgage, you have $200,000 in equity. A bridge loan may cover up to 80% of that equity, giving you access to $160,000 to use towards the down payment on your new home.

Once your current home sells, you can use the funds from the sale to pay off the bridge loan. If your home sells for more than the amount of the bridge loan, you can use the extra funds towards the down payment on your new home or pay off the loan!

Why Use Bridge Financing for a Mortgage?

Bridge financing can be a useful tool for homebuyers in a variety of situations. Here are a few reasons why you may want to consider using bridge financing for a mortgage:

  • To avoid a gap in housing: If you're selling your current home and buying a new one, there may be a gap between when you have to move out of your current home and when you can move into your new one. Bridge financing can help cover the costs of temporary housing during this gap.

  • To secure your dream home: In a competitive housing market, it can be challenging to secure your dream home without a firm offer. Bridge financing allows you to make a strong offer on a new home without having to wait for your current home to sell.

  • To avoid a contingency clause: In some cases, sellers may require a contingency clause in the purchase agreement, stating that the sale is dependent on the buyer's current home selling. This can put you at a disadvantage in a competitive market. Bridge financing allows you to make a non-contingent offer, making your offer more attractive to sellers.

Alternatives to Bridge Financing

While bridge financing can be a useful tool for homebuyers, it's not the only option available. Here are a few alternatives to bridge financing that you may want to consider:

  • Home equity line of credit (HELOC): A HELOC is a line of credit that uses your home's equity as collateral. You can use the funds from a HELOC towards the down payment on a new home and pay it off once your current home sells.

  • Borrowing from family or friends: If you have family or friends who are willing to lend you the funds for a down payment, this can be a viable alternative to bridge financing.

  • Selling your current home first: While this may not be an option for everyone, selling your current home before buying a new one can eliminate the need for bridge financing altogether.

Bridge financing for a mortgage can be a useful tool for homebuyers who are in the process of selling their current home and buying a new one. Our expert mortgage brokers are here to help you find the best solution based on your situation and financials. Bridge financing is not the only option available, and it may not be the best choice for everyone. Consider your individual circumstances and consult with us today to determine if bridge financing is the right choice for you.

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