Tuesday, June 8, 2021

Today's Finance Trick

If you want to buy a house somewhere not constantly jammed with traffic, how do you sell your Boise house and buy the new one without making a contingent offer which is not popular with sellers and there is the risk some Californians will show up with a million in cash and knock you out.

The answer is a bridge loan. These are short term (6 months to one year loans) where the equity in your current home is part of the collateral for the loan.  So let us say you are a typical high end Boise homeowner with a $400,000 home with $120,000 in equity because you bought it last month.  You find an attractive $250,000 home in Wyoming.  The bridge loan is typically higher interest rate than a traditional mortgage because it is short term.  You normally need a great credit score and income.  But apparently approval is much faster than a conventional mortgage.

You move into your new home and make payments on the new house and the old house until the old house sells.   You now have the proceeds of that house to refinance the new house on a conventional mortgage.   Of course if you have no mortgage on the old house you just pay off the bridge loan with the proceeds.   I wish that I had known about bridge loans last year.  We had a mortgage on our new house while waiting for the old house to sell.


  1. We bought a new home in December and used a bridge loan. Our old house sold so fast that we didn't pay a cent in interest.

    The same thing happened with my parents this month as they are downsizing.

    If that is normative, bridge loans in this market are more like a loss leader for banks that will end up with the actual mortgage.

  2. "I wish that I had known about bridge loans last year. We had a mortgage on our new house while waiting for the old house to sell."

    Why is a bridge loan (at a higher interest rate) preferable to two mortgages?

    1. We have no mortgage right now. (Mortgages are bad.) A mortgage on the new $600,000 house would be a little more cash flow than I want. Sale of the current house more then pays off the bridge loan.

    2. I don't think that answered my question.

    3. The monthly income to service two separate loans is substantial and I really only need to borrow the value of the new house until the old one sells and the cash pays off the bridge loan. There is likely no huge difference but it is feels less scary.

    4. But if you had no mortgage, there would still be only be the one loan to pay off, whether a new mortgage, or a bridge loan. But I get the short-term issue. Of course, there may be income tax deduction considerations.

      I once paid 2 simultaneous mortgages (with attendant utilities, insurance, upkeep, taxes, etc.) plus a third loan for a piece of undeveloped land, for about 2 years. Not recommended.

  3. It seems that real-estate bridge loans are basically mortgages on the new house backed by the collateral of the old house, with enough cash out to make payments on the old house for a while. So, for example, if my old mortgage payment is $1000/mo, the bridge loan will cover the purchase of the new house plus about $12,000, so you can pay off the old loan for a year, while your income pays the bridge loan. This requires you to have sufficient equity in the old house to make it safe for the bridge lender.