Bridge Loans Overrated? Why We Like Equity Lines

    We are asked constantly about “bridge loans,” or temporary loans (usually 2nd mortgages) that sellers take out prior to selling.

    Bridge loans can be used for necessary repairs or for a down payment to allow sellers to buy a new home before selling their old/current home.

    There are several types of bridge loans available including the following:

    1) Free or very low-cost bridge loan, but sellers have to use a designated lender to finance their purchase.

    Some mortgage banks and real estate brokerages offer these loans and they are a good deal in general b/c of their low-cost and simplicity. But, the drawback often is that the free bridge loans are tied to new first mortgages, for the purchase of a new home, that are often not the best financing available (or even close in some cases). These bridge loan recipients are also often required to use a particular listing agent who may or may not be the best option.

    2) Cross-collateralized bridge loan.

    One of our bridge lenders offers large cross-collateralized loans to finance the purchase of a new home. The new loan pays off the existing home’s first mortgage and finances the purchase of a new home (both the old and the new home are tied to the mortgage as collateral). When the old home sells, the proceeds are used to pay down the cross-collateralized loan and it is re-amortized. This too is a great option b/c of its relative simplicity and flexibility. But the financing overall is often not the best available (similar to the above scenario).

    3) Points and fees bridge loan.

    This is the standard “bridge loan” that has been available for years. Lenders have to make money somehow. Hence, if bridge loan lenders are not cross-collateralizing or forcing sellers to obtain a new first mortgage through them, the only way they can make money from a bridge loan (that will pay off very quickly) is by charging points and fees, making a small bridge loan very expensive in many cases.

    4) Home equity line of credit.

    Equity lines are not bridge loans per se, as they are just large lines of credit that most sellers can easily obtain from their primary bank – up to 90% combined-loan-to-value in most states (but to only 80% in Texas). This is often the best option for most sellers simply b/c of the flexibility equity lines offer. They are almost always free; they have no pre-payment penalties other than a small “early termination fee;” they accrue no interest unless drawn upon; and they often provide more cash than traditional bridge loans b/c of their higher loan-to-value limits. The drawbacks to equity lines include the time it takes to get them (banks often move very slowly) and overall debt ratios. Many sellers do not have enough income to qualify for a new mortgage while also holding an existing first mortgage and an equity line. There are ways to work around debt ratio constraints but they do not work for every seller.

    Jay Voorhees
    Founder/Broker | JVM Lending
    (855) 855-4491 | DRE# 01524255, NMLS# 310167

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