Bridge loan
A buyer of a new home may find himself or herself in an awkward position when he or she is unable to come up with the promised down payment on account of the existing home not being sold before closing on the new home purchase. This puts the deal to buy the new home in jeopardy. To emerge from this position, the buyer could avail of a bridge loan by which he or she can borrow against the equity in the existing home. The larger the equity in the home, larger can be the amount that you can borrow. The loan can be settled when the existing home is sold.
Considering the purpose for which a mortgage bridge loan is taken, the time period for which it is granted generally is short extending from six months to one year. The interest rate as well as the fees for obtaining home mortgage bridge loans is relatively high. This is so due to the short term nature of the loan. You don't have to pay interest until you have sold your existing home. On selling the home, the principal as well as the accrued interest can be repaid using the proceeds from the sale. It should, however, be noted that your gain on the sale is reduced to the extent of the fees paid to obtain the home bridge loan and the interest paid on the loan.
Home bridge loan strategies:
1) Borrow only against your current home. The loan can be obtained against the equity in your existing home.
2) Since the interest paid on a home bridge loan is tax deductible, ensure that you claim the deductible in your tax return.
3) It may so happen that you may not be able to sell your home before the loan becomes due. Therefore, ensure that there is a clause in the loan contract which allows you to extent the loan term, if required.
4) Also ensure that there is no penalty clause in the loan contract in case you are in a position to repay the loan before it falls due.
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