Bridging the Gap - Borrowing Until Your Old House Sells

Bridge loans or gap loans are loans used to bridge the gap between two transactions. Duh! Pretty simple, eh? Unfortunately not.

Bridging loans can seem like the calm after the storm of trying to close on a new home before the old one is sold. But that calm may turn out to be the just eye of the storm, with the worst yet to come.

First of all, a seller would not be in a position to need a bridging loan if everything she planned had gone as she had wished.

Second, bridging loans cost money, in the form of additional interest over and above that of a longer term loan and never forget the balloon note of repayment sitting out there at the end of the loan.

Caution dictates that a seller should wait until her current home sells before buying another house. However, whether due to relocation, change in family or job-related circumstances, or simply a slowing market for home sales, people sometimes find themselves with two houses. These are typical situations where sellers will need bridging loans. Bridging loans enable a seller to borrow money either unsecured, but with a pending contract for sale, or against the equity in her current home until it sells.

Bridging loans usually include a balloon note that has to be repaid at the end of loan period. This can be disastrous if the home used for equity does not sell or does not sell for as much as necessary. However, if that home sells fairly quickly or for the expected amount of money, the bridging loan can usually be rolled into the new home mortgage in order to satisfy the balloon repayment provision of the bridging loan.

Obviously, if the house you are selling has a good contract on it to a seller who has a locked-in mortgage from a solid mortgage company, then a bridging loan can be a lifesaver. However, with the failure of a number of so-called front-line mortgage companies, it is getting harder for lenders to justify the use of a bridging loan. In good times, people have used leverage to achieve great financial gains. Remember, however, leverage works both ways and so do bridging loans. In other words, instead of staving off the inevitable, bridging loans can accelerate it.

for a discussion of loans, financing and refinancing for homeowners, please see Loans

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