When move in day doesn’t align with move out day, bridge financing helps homeowners get through such troubled waters. But…how does bridge financing actually work?
It’s a loan that helps you cover the down payment on the new place, and all of the other costs that go along with the sale from legal fees to real estate agent commissions, while keeping up your mortgage payments on your existing abode until the new owners take over.
There are a few criteria to meet before a lender will consider giving you a bridge loan. There must be proof of the purchase agreement and the sale agreement on the home you are buying and the one you are selling.
And be aware that this stopgap is just that, a short-term loan, typically for about 90 days maximum.
There is also a small set-up fee, from about $200 to $500 charged by the lender to have the bridge loan arranged. However, it’s worth asking the bank that’s arranging your new mortgage to waive or reduce this administration fee. Also, the rate charged on the bridge loan is about two to three per cent above the bank’s prime.
Depending on the lender, the bridge loan amount and the length of time will require a lawyer to register the loan on title. If this is the case, a borrower may incur additional legal fees. Other lenders simply extend the bridge loan as a promissory note which doesn’t need to be registered on title.
There’s another school of thought that recommends putting bridge financing in place even when the move in date aligns with your move out day.
It allows you to close your new home on the appointed date, eliminating dependence on your buyer to close on the same date, especially if your buyer has put down a small deposit; if this is the buyer’s first home purchase; if a second mortgage is required or if the loan is coming from a non-institutional or private lender.
For the minimal cost and time involved in setting up bridge financing, it is well worth the effort to avoid a potential headache and expenses sure to crop up if you are unable to move on the designated day, from storage fees to service cancellation fees such as cable or home security and legal fees.