Bridge Loans – What You Need to Avoid?
In most cases, bridge loans are used as a last resort, which means that you’d better avoid them if you have other options. In this article, I will tell you some ways to help you avoid bridge loans.
Sell something else instead of your house
To purchase a house may be a big investment in your life, thus to buy another house should be a huge investment. The first thought that crosses your mind is to sell the old house to purchase the new one.
But there are too many problems once you sell the house. For instance, you can’t sell your existing home in a short period, and thus you can’t use the proceeds of the sales of your home to purchase the new house.
Under the circumstance, you could sell something else other than your house to get cash. For example, you may sell your car, your computer, your furniture or your jewelry.
Buy a less expensive house
When I come up with the option that encourages you to sell something else, you may wonder if the sales of all these stuff are sufficient to fork over the down payment of the new house. If that is the case, I think you should buy a cheaper house.
Suppose you sell your car and other things, you get $30,000 dollars. The appraised price of the new house is $200,000. To avoid the mortgage insurance, the loan-to-value ratio should be 80% maximum, so you have to shell out at least $40,000 for the down payment. Apparently, your proceeds are far less than that. So maybe opting for a cheaper house (say the house value is $150,000) is a better move, because the minimum down payment of a $150,000 house is $30,000.
Take out a home equity loan
Providing that you have no car and no valuable jewelry, and tapping into your home equity is the only way that you can choose, you can take out a home equity loan in a proper way.
Home equity loans are secured by your house, that’s why it is also called second mortgages. As a secured loan, the interest rate of a home equity loan is much cheaper than a bridge loan. A home equity loan will become due once you sell your property. By advising you to get a home equity loan, I will give you some useful tips.
There are two types of a home equity loan. Generally speaking, a home equity loan refers to the lump sum home equity loan with fixed interest rate. A home equity loan with a variable interest rate is named as home equity line of credit. Sometimes you can make the best of your home equity if you combine them.
- Several years ago, you bought a $150,000 house, and you paid down $30,000 and got a mortgage of $120,000 so as to avoid the mortgage insurance. Now you have built up $60,000 home equity. At this time, you want to purchase a $300,000 house, and the minimum down payment required is just $60,000 if you still wish to avoid the mortgage insurance. Under the circumstance, it is advisable to get a lump sum home equity loan.
- Still this sample. Let’s say you decide to buy a $200,000 house. If the mortgage insurance is expected to be waived, you should put down at least $40,000. With the home equity of $60,000, you can take out $40,000 for the down payment and build a line of credit on the remaining $20,000. Plus, the remaining $20,000 can grow over time if you don’t access the account. You can withdraw cash anytime you wish without exceeding the credit limit and the unused part will still grow.
As is seen, different decisions can be made as per different financial and investment situation. So please do some math about your situation before you make any decisions.
Compared with home equity loans, reverse mortgages have more payment types – lump sum, monthly payment, line of credit and hybrids.
To apply for a home equity loan, you should present employment status, income proofs as well as credit standing. All these things are used for the lender to determine your repayment ability and whether you can pay back the loan on time. To protect your house from foreclosure, you should make monthly payments on time. You are eligible for a home equity loan even if you have an existing mortgage on the same house.
On the contrary, reverse mortgage requires no monthly payments and credit checks. The loan will be fully payable only if you die or lose the property ownership. In addition, you can apply for a reverse mortgage even if you have no income at all. But reverse mortgage should be always put in the first place, meaning that if you have an existing mortgage on your house, you should pay it off with your reverse mortgage. Other mortgages on the same house is not allowed, if put it simple.
However, reverse mortgage requires that applicants should be at least 62 years old. Therefore, if you are below 62, reverse mortgage is not an option any more. If you are 62 or more, you can weigh home equity loans and reverse mortgages.
To avoid a bridge loan, you should take out a lump sum reverse mortgage, since it is a large amount of money. Yet the home equity you can tap with a reverse mortgage can’t be calculated as the same way with a home equity loan. Your home equity is the amount after subtracting the loan balance from the appraisal house value.
So if you have paid $70,000 on your $120,000 mortgage, it seems that your home equity is $100,000 when the down payment of $30,000 is added. Yet you still owe $50,000 on your first mortgage, that is to say, when you get a reverse mortgage secured by the same house, you can only get $50,000, let aside other costs and fees.