- The Washington Times - Thursday, January 13, 2005

Q: I have a first-trust mortgage with a balance of $52,000 with a fixed rate of 7.25 percent. Our

second trust carries a balance of $33,000 with a fixed rate of 6.50 percent. Our house is worth at least $400,000.

We are both retired and are planning to relocate to southern Virginia to be closer to family. The real estate agent said that we would need to make an offer that isn’t contingent on the sale of our current home. I don’t see how this is possible because we need to sell our home in order to get the cash to buy the new house.

We do not want to have a mortgage. The agent suggested that we obtain a bridge loan. Can you help us?

A: The term “bridge loan” is best described as a purpose rather than a specific type of loan.

Your agent is correct. In order for you to make a competitive offer on a new home, it should not be contingent on the sale of your home. The purpose of a bridge loan is to provide temporary financing to avoid sensitive timing issues regarding the real estate transaction.

For example, you may find a house that you love, and the seller is eager to settle as soon as possible. In order to have your offer accepted, you agree to settle in 30 days.

This would give you only 30 days to fix up your current residence, put it on the market, sell it and settle. Such a rush is likely to prevent you from getting the best price.

The alternative would be to obtain a costly mortgage secured against the new home that would be paid off when your house is finally sold. To complicate matters, carrying the mortgage on a new home along with your current debts may cause a qualification problem.

Some lenders offer bridge-loan programs that are geared to solve exactly this type of problem. Typically, these programs waive qualification guidelines because the situation will be short-term.

Because the loan will be short-term, a bridge loan is likely to cost you some money. Lenders don’t want to go through the trouble of making a loan that’s going to be paid off and closed in a matter of months unless they can make some money.

Expect a traditional bridge loan to carry some hefty up-front fees.

Let’s look at another option. Consider taking out a home-equity line of credit and paying off your two existing loans.

A typical HELOC will carry a rate that’s equal to the prime rate, which is at 5.25 percent. Find a HELOC that will allow you to borrow up to 90 percent of your current home’s value.

If your house is worth $400,000, a 90 percent HELOC would be equal to $360,000.

At the time of settlement, you would take an initial draw of $85,000 to pay off your existing mortgages. This would leave you with $275,000 in available credit.

I see several advantages to this plan.

First, you are paying an average rate of perhaps 7 percent with your current loans. Consolidating these loans to one new loan at 5.25 percent makes plenty of sense.

Second, HELOCs typically carry low fees — probably far less expensive than a traditional bridge loan.

Third, a HELOC allows you to borrow money when you need it. You’re not forced to take one large sum of money ahead of time, paying the monthly interest charges.

Fourth, unlike most bridge-loan arrangements, you will have to qualify for the credit limit requested. However, most HELOCs allow for interest-only payments, resulting in a low minimum payment. This means that qualification will be easier.

What I’m suggesting is to take out a HELOC and use it as a bridge loan. If you can make something like this work for your situation, it will very likely be a better plan than a traditional bridge loan.

One caveat: Lenders aren’t stupid. Many HELOCs are offered with little or no closing costs as long as the loan is not paid off before a certain time. If you pay it off early, you’ll be hit with the closing costs. Paying such costs may not be avoidable, but it’s important to know all the details.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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