One of the smallest, quickest and shortest terms of homeowner loans is referred to as a bridge loan. Compared with other homeowner loans such as first and second mortgages, refinances, home equity loans and debt consolidation loans that use the home as collateral, bridge loans are rare.
A bridge homeowner loan is short term and designed for the purpose of helping a homeowner bridge a cash crunch gap. Hence the name bridge loan. The most common for of bridge homeowner loans is the situation in which someone has bought a new home but has yet to sell their current home. The most common reason for this double ownership is a geographic relocation for a job.
Some homeowners will rent an apartment, condo, townhouse, mobile home or single family home for a short term while waiting for their home to sell. Others, however, see that for convenience, monetary advantage or things like not uprooting their children once again with a third move to a new school, they would prefer the bridge homeowner loans.
Short term rentals can be more costly than the interest paid on the short term bridge homeowner loans.
There is a wide variation on the rates and terms of bridge loans, however, and the origination fees can be quite high. Most bridge loans are written for six months and the collateral used for these homeowner loans is the home that the borrower is attempting to sell.
The problem with these bridge loans, besides the potential high cost, is that homes don’t always sell in six months, and markets and market values can change. Consider, for example, the difference between the market value of a home in the once thriving mining area of Allentown PA where jobs were plentiful and homes in demand.
That same property today may well be worth one tenth of what is was about 40 or 50 years ago. This kind of thing can happen overnight as plants close and industries struggle to survive.
Who would have thought, for example, that there would come a time that 20,000 IBM employees would vacate the Triple Cities (Binghamton, Endicott and Johnson City) area of upstate New York with the close of that original plant, or that Knight Ridder Newspapers would cease to exist?
Before you consider homeowner bridge loans, look elsewhere for funding. Your best financial bet is, of course, to avoid the two-home ownership situation in the first place. If you can’t stay in your current home until it sells, sell other assets such as your boat, your second or third car, or borrow against your 401(k).
You might even consider a temporarily lengthy commute or leave your family in your current home, take an inexpensive rental in your new location and fly or drive home alternate weekends.
There are plenty of homeowner loans that are smart, that are good buys, and that will save you considerable money and may actually make you some money. Debt consolidation loans are an example of the latter. Bridge loans, however, are seldom the best financial deal you can find, and are often one of the worst.