Bridge Loans: Good, bad, ugly?

terrig_2007May 4, 2007

My husband and I are trying to sell our house. ItÂs been on the market since April 1, listed with a realtor well known in our town for selling houses in our price range. WeÂve had lots of showings and a couple open houses. WeÂve had a few people return for second showings. We got one offer after only three weeks, but the buyer backed out. We dropped our price this week and are prepared to drop it again in a week or two if we get no bites.

We have an accepted offer on a new house that is contingent upon us selling ours and closing on the new house by June 29. WeÂve already completed the whole house and radon inspections on the new house (cost us $400), and the sellers are fixing or have fixed the items we requested be fixed from the inspection. The sellers have a kick-out clause; weÂd have 72 hours to remove our contingencies if they got another offer. Our only contingency at this point is selling our house first. We are fully approved for a loan.

We have looked into getting a bridge loanÂand have been approved for oneÂif our house doesnÂt sell by June 29 or if the sellers enforce the kick-out clause. Their house has been on the market since January. They have bought a condo and moved out, so the house is empty and available for immediate possession.

WeÂve wrestled with the idea of the bridge loan. On one hand, we already have some money and emotion invested in the new house. It fits our needs perfectlyÂthe size, the layout, the location, etc. We saw 20 houses before seeing this one and knew this was the one for us the moment we saw it. (And, yes, I know there is more than one "right" house, but itÂs like this one was built just for us.) We can afford the interest-only payment as it will be very close to the amount of our escrow payment on the new house. We can swing the double utilities for a while, and weÂre OK with taking care of two houses at the same time (both houses are in the same town, just a few miles apart).

On the other hand, weÂre really concerned about the strain of owning two houses would put on our finances and marriage over the long haul. The housing market in our area is very slow. Houses are sitting a very long timeÂ-some as long as two years! We donÂt see our house sitting for very long since itÂs in a good first-time buyer price range (under $90k), but since none of us have a crystal ball, itÂs hard to say when itÂll sell.

So IÂm looking for adviceÂ-from the people whoÂve been in our situation or currently are. If you got a bridge loan, tell me why and how it went and if would you recommend it. If you didnÂt get a bridge loan, why not?

Thanks in advance.

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Who's approved your bridge loan, and what terms come with it?

Dave Donhoff
Strategic Equity & Mortgage Planner

    Bookmark   May 4, 2007 at 12:25PM
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We currently have a bridge loan. We got it so we could get our current house without contingencies and also so we could take our time moving out, cleaning, etc. on our old house. We didn't want to be living there and showing the house. It's been on the market a month now, and a contract just fell through this week. We still have some interest in the house, but we are nervous with the interest dollars ticking on the loan. I still think we did the right thing.

    Bookmark   May 4, 2007 at 12:52PM
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Dave...Our local bank approved the bridge loan. The rate is 6.3%, no points.

Bozogardner...This is what we don't like in the house and showing it. It's very stressful keeping it in "show condition" especially with my husband's two teenage sons who spend every weekend with us! I think how nice it would be to leave something sit out and not have to worry about it.

    Bookmark   May 4, 2007 at 1:53PM
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I have toyed with doing this, although I have not seen the perfect house yet. Some are but they are outside my range (just outside). What I can afford does not make me want to risk my finances. I just do not love it enough. I do have hte same problem as I have many small children who love to crayon on walls and mess things up. Our house needs some work and I hate the idea of doing it while living in it (or at all but that is another story).

My real fear is that prices are not done going down in our area and if I do not sell mine now, who knows what I may get for it a year from now

    Bookmark   May 4, 2007 at 10:30PM
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A few years back, we went through the stress of moving and having our empty house sit on the market for almost six months. I can't tell you how helpless and upset I felt during that period. And the market is a lot worse today.

If I were you, I would not do the bridge loan. Instead, I'd drop your home price right away, add a sentence saying "Motivated seller, bring all offers." If you get a decent offer, take it, as long as the price reduction still puts you ahead of paying a year's worth of interest on a bridge loan (because it sounds like that is a real possibility in your market). And if you don't get a reasonable offer before you need to commit to the new house, perhaps the new house wasn't meant to be.

    Bookmark   May 5, 2007 at 2:21PM
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I second sb_mom's suggestion. Drop the price enough to draw lots of interest and add the "Motivated seller" bit. We had something like a bridge loan (we borrowed from the HELOC) and only had to make 3 payments (3 months) and it was incredibly stressful. I would NOT do it again - to be honest, I would let the house go before doing another such loan.

    Bookmark   May 7, 2007 at 9:53AM
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Thanks for all the suggestions. DH and I have decided to go ahead with the bridge loan if we have to. We can handle it financially quite well. We've dropped the price on our house once already and will do so again in a couple weeks if we don't get any offers by then. We already have the "motivated sellers" part in our ad. We're confident it will sell soon because we've already had one offer (which fell through due to the buyer) and a large number of showings, plus our agent is working very hard to sell it (she's our agent for both the sell and the buy so she stands to gain a lot if this all goes through). I do not see it sitting on the market for a year. We just sold another house in the same market this past winter and it took four months to sell.

    Bookmark   May 7, 2007 at 10:25AM
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Oh, please don't take the risk! We were in the same boat as you back in '90 and made an emotional decision to buy another home before we sold the home we were in. We fully expected to sell our less than 2 year old home fairly quickly. We were naive about the changing RE market and felt confident that our beautiful, upgraded, large home in a very desirable neighborhood would not stay on the market long. So, we agreed to buy another new home that we loved even more. We didn't realize that the inventory of available homes on the market was growing and buyers now had the upper hand. You all know the scenario back then. As the market for sellers tightened, we kept lowering our price to keep in line with others, but selling our house was clearly beyond our control. The "market" was dictating sales. We even put BOTH houses on the market for a time, willing to take whatever sale came first. The worst was yet to come when we finally sold at a much lower price than what we ever expected, and then had to pay the bridge loan fees which accumulated over the two years our home was on the market. We had to refinance to pay off the bridge loan fees, leaving us in a home we loved but with much higher payments. It was a horrible experience, and it put huge strains on us as a couple. It's just not a good market in which to let your emotions make your decisions. Please hold off on the home you want to buy until AFTER you sell your current home.

    Bookmark   May 11, 2007 at 9:53AM
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OOfasis...thanks for replying, but every situation is different, as is every market. We've heard good stories too about bridge loans. We've made the decision that is right for us. sorry yours didn't work out so well for you.

    Bookmark   May 11, 2007 at 4:05PM
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I only use bridge loans when I have a sale contract signed and need the cash sooner than the buyer can get to settlement.

    Bookmark   May 11, 2007 at 5:12PM
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Good luck, and please let us know what happens!

    Bookmark   May 11, 2007 at 10:08PM
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When we were faced with a kick-out clause on the house we had only dreamed of, we went ahead with bridging financing that we could not afford. We rented out the NEW place to short-term renters who were new in town and looking at places to buy.

It worked out much better to stay in the house we were trying to sell, keeping it in good shape to show and being willing to let potential buyers se it with short notice.

    Bookmark   May 12, 2007 at 7:36AM
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We thought about a bridge loan, but used a HELOC. We were selling 2 homes and buying one. We bought our home before the other 2 had sold! Crazy, huh? Anyway.........

Our split between the 1st mortgage and HELOC ended up being like a 55/45, instead of the normal 80/20 you hear about.

What we did was use the proceeds of house #1 for the part of the loan, and the HELOC for the rest. We paid off the HELOC when house #2 sold, so we are left with a smaller loan and very good rate.

I know it's confusing..

    Bookmark   May 14, 2007 at 8:59AM
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What is a HELOC? We are debating the bridge loan way to go and this term is new to me.

    Bookmark   June 4, 2008 at 9:15AM
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Home equity line of credit. Basically, you are putting a second mortgage on your existing home in order to buy the new one. Obviously, you need to have quite a bit of equity in the existing house to use this strategy, which is why many people in this situations get bridge loans instead.

We've done it and it worked out fine. It all boils down to whether you can comfortably make all the loan payments involved. If it's really a financial stretch or if you're the type who can't help fretting about the future, then you're probably best off not doing it because you'll drive yourself crazy worrying when/if your existing house will sell.

    Bookmark   June 4, 2008 at 9:30AM
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You won't able to get a HELOC while your home is on the market.

    Bookmark   June 4, 2008 at 10:48AM
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how much will you pay in interest on the bridge loan if your house sits 6 months? (that's pure expenses--money actually going out of your account, not equity dropping in hypothetical value).

What would happen w/ your house if you dropped your price that much?

    Bookmark   June 4, 2008 at 12:13PM
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OP here...not sure why someone dredged up such an old thread. We did go through w/the bridge loan a YEAR ago, but had it only a month when our old house sold. We got lucky.

    Bookmark   June 4, 2008 at 2:42PM
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Terrig, I think lyn11543 joined today, and found this thread while she was looking for info about bridge loans.

    Bookmark   June 4, 2008 at 2:50PM
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talley sue, I did just join and have learned a lot just by reading through other entries. We fell in love with a house we can pay cash for when ours sells but the other owners have a bump list that will go into effect Sept. 1. We will then have three days to come up with the money we need or will lose the house. So I am researching various ways of doing that. Thanks for the responses.

    Bookmark   June 5, 2008 at 9:48PM
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"a house we can pay cash for when ours sells"

I was in the same situation and just got another conforming prime full-doc 30 year mortgage without prepayment penalty and the lowest fees that I could find. Closed on new house, sold old house a month later, paid off new house.

Would not have done it, if I would not have been able to pay for both mortgages indefinitely.

    Bookmark   June 6, 2008 at 12:46AM
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I also replied to this last year. We carried a bridge loan for about four months before we closed on the old house. We were lucky to close pretty quickly, but we also had no mortgage on the old house. So we were able to make payments if needed if the house didn't sell quickly.

    Bookmark   June 6, 2008 at 11:34AM
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