The biggest, most perplexing challenge for many equity-rich California home sellers is fear they are walking away from a low fixed rate mortgage and low property taxes and then buying into the abyss.
There are few good home choices to buy and plenty of buyer competition in a tight inventory market, now four years running.
Do I sell first? Maybe a rent back for 60 days in hopes I can find something and get escrow closed in time? Or perhaps move twice by selling, renting and then finding a home to buy.
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Few home sellers have the appetite to accept offers from contingent buyers. (Contingency means a buyer will complete a home purchase after they sell and close their own home). Amid explosive buyer demand, home sellers have better offers such as all cash offers or buyers who can finance and close within 21 days.
A bridge or swing loan, though expensive, could be one solution for homebuyers looking to unlock their home equity and use it toward buying a home without a contingency attached. And it brings certainty about what you are buying before you release your current home to be sold.
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“The biggest benefit is you don’t first have to sell your property, said Ken Thayer, president at Residential First Capital. “(This) unlocks equity and gives them peace of mind.”
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Here are the basics of a bridge loan.
An appraisal is done on both properties to confirm their values. The bridge lender will have a first-position mortgage against the departing residence and a first-position mortgage lien against the home being acquired. Bridge lending typically lends up to 60% combined value of both properties (industry parlance calls this loan-to-value). I did find one lender loaning as much as 75% of the combined property values.
Here’s an equity extraction example at 60% of combined property values: Let’s say your existing home is worth $1 million. You own the home free and clear. You are paying $1.5 million for your new palace. The combined value of the two homes is $2.5 million. The maximum cash-out bridge loan would be $1.5 million or 60% of the combined property values.
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A single first mortgage lien is placed against both properties, which is called cross-collateralization. You can close escrow on your new home with the $1.5 million cash-out loan.
The catch: Buyers cannot finance any financing charges or settlement charges, according to Thayer. Buyers would have to bring those funds out of pocket. If the settlement charges are $6,000, then you’ll be writing a check for that amount.
Let’s say you net out $1 million on your departing residence.
You originally borrowed $1.5 million. You still owe $500,000 even after the $1 million was paid back from the sale of your departing residence. Pay off the remaining $500,000 by refinancing the remaining bridge loan balance with a conventional 30-year mortgage. Or pay cash if you have it.
Bridge loans cost about 2 points or 2% of the loan amount. For $1.5 million, that’s $30,000 plus settlement charges of perhaps $6,000. Terms are for 11- months, with a balloon payment required at the end of the term (if not paid off). Rates are interest-only at 9.5% to 10.5%, says Thayer. There is no required ability-to-repay income qualifications.
If you are buying from a new home builder, you could ask the builder to pay the bridge financing costs so that you can make a non-contingent purchase.
Bridge financing is an expensive proposition for sure. But it might still be money well spent.
First, you are buying what you want and what you choose to buy. No angst. As home prices continue to ascend, you might net out more from your departing residence due to a delayed sale. You go to sleep tonight, and your home is worth more when you wake up tomorrow morning in many cases. Sellers don’t have to move twice, which is also expensive and very time-intensive.
Freddie Mac rate news
The 30-year fixed rate averaged 6.69%, 9 basis points higher than last week. The 15-year fixed rate averaged 5.96%, 20 basis points higher than last week.
The Mortgage Bankers Association reported a 3.7% mortgage application increase compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $281 less than this week’s payment of $4,941.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.5%, a 15-year conventional at 5.375%, a 30-year conventional at 5.99%, a 15-year conventional high balance at 6.625% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high balance conventional at 6.875% and a jumbo 30-year fixed at 6.75%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.
Eye catcher loan program of the week: A 30-year adjustable with 30% down, fixed for the first five years at 5.75% 1 point cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com.
