If you find yourself in the position of having to buy a new house before selling your old one, you may benefit from a Bridge Loan. A Bridge Loan enables you to borrow against the equity that is tied up in your old home until it sells. There are several risk factors to consider before deciding that a Bridge Loan is right for you.
If your old house doesn’t close quickly, you could wind up paying for two houses longer than you had anticipated. This effectively forces you to pay three mortgages (the first one for your old home, the second for the Bridge Loan and the third for your new home). Combine this with the prospect of paying two property tax bills, two premiums for homeowners insurance and two sets of utility bills. These can add up quickly.
One more potential pitfall is the state of the market. If property prices plummet while you’re still trying to sell the old house, you may not be able to sell it for enough money to pay off all your outstanding loans. The holder of the Bridge Loan may then be able to foreclose on your new home to make up for the shortfall.