Construction and Bridge Loans Match Special Needs

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Most people get the jitters sometime during the home buying or selling process. Certain situations can stir extra anxiety, such as building a new home or buying a new house while trying to sell your old one. In such circumstances, borrowers can turn to special types of financing: a construction loan or a bridge loan (also called a swing loan).

Construction loans come in two types:

1. Construction-only loan. The borrower pays closing costs for the loan, which usually has a six-month to one-year term. During that term, the borrower pays only interest, and the principal is due in a lump sum at the end of the term. The borrower then applies for a mortgage, which means another closing and an additional set of closing costs.
2. Construction-to-permanent loan. Your lender automatically modifies the construction loan into a mortgage after construction is complete. The borrower applies for one loan and pays only one set of closing costs. But the borrower commits to the mortgage rate and terms before the house is finished. No shopping around later for a better deal.

Usually you save money with a construction-to-permanent loan because you pay closing costs only once. But be sure the permanent mortgage meets your needs. Otherwise, you're better off getting two separate loans.

A bridge or swing loan allows you to buy a new house without having sold your existing home. You could use a bridge loan in two ways: Borrow enough to pay off your old mortgage and cover the down payment for your new home. Or leave your existing mortgage in place and borrow against the equity in your existing home to pay the down payment for your new house.

A bridge loan is for a short term, say six months. Usually you make no payments on the loan during that term. You pay off the accrued interest and the outstanding balance on your bridge loan when your old house sells.

Find out if the lender will extend your bridge loan if your home still hasn't sold at the end of the term. Still, expect a bridge loan to last no longer than a year total. If your home still hasn't sold, you'd have to pay all interest accrued and refinance to get another loan with fixed monthly payments to cover both the principal and interest.

In the worst-case scenario, you could end up with three monthly payments: your old mortgage, your new mortgage, and your bridge loan. That's why bridge loans can be risky. Experts advise using one only when there's a timing issue – that is, you have a signed contract to sell your old house and you're waiting for the closing to get the funds to pay the down payment on your new home.

If you need financing to build a home or solve a timing problem with the closings for your old and new homes, a credit union loan officer can help – contact one today!

© 2007 Credit Union National Association Inc. Information subject to change without notice. For use with members of a single credit union. All other rights reserved.

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