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real estate

Building a Better Bridge Loan

A new way to finance the gap between buying and selling a home.

In an ideal world, you would be able to sell your house on Monday and use the proceeds to buy a new one on Tuesday. But particularly in this buyer's market, it's more likely that you will have to buy before you sell and make two mortgage payments for a time.

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For years, mortgage lenders dealt with this overlap with bridge loans. You borrowed enough money to pay off your old mortgage and cover the down payment on your new home, or you kept your old mortgage and borrowed against your home's equity for the down payment. But interest rates are high -- up to 12% -- and fees and closing costs can run a few thousand dollars.

A more common solution these days is to use a home-equity line of credit on the home you're selling to come up with a down payment and, perhaps, payments on the new mortgage. Rates average 8.7%, according to HSH Associates, Financial Publishers; fees, if any, are lower than with a bridge loan.

How it works. Lenders generally won't let you take out a home-equity line of credit if your home is already listed. That means you'll need to fill out the application before you put out the For Sale sign. Many banks will lend you the money without up-front fees, but most loans have an early termination fee of about $300 if you pay off the loan within two to four years.

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You may be able to get that fee waived if you use the same bank for your new mortgage, or you can pay about $150 up front to avoid the fee later. But even if you pay the fee, you'll come out ahead.

If your home is already on the market, there are two ways to tap your equity. You could tack a line of credit onto your new mortgage. Or if the higher overall loan amount would raise your interest rate, you could apply for a "departure" line of credit on your old home. Because lenders know that such loans are short term, they generally charge a 1% origination fee plus closing costs of $400 to $800. For example, if you borrowed a $60,000 down payment, you'd pay as much as $1,400 in fees.

If you don't have enough equity in the home you're selling, you could write a home-sale contingency into the purchase contract on your new home. Sellers wouldn't consider such contingencies when the market was hot, but they might now.

You'll increase the chances that sellers will buy in if you add a kick-out clause: The sellers can keep the home on the market while you try to sell your home. If they get an offer they'd like to consider, you have three days to either withdraw your contract or drop the contingency.

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