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Consider a bridge loan to avoid a fire sale

By Jeff Lazerson

1/31/19

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary 

From Freddie Mac’s weekly survey: The 30-year fixed averaged 4.46 percent, increasing one basis point from last week. The 15-year fixed rate also increased one basis point from last week landing at 3.89 percent. Rates have been flat for four weeks.

The Mortgage Bankers Association reported a 3 percent decrease in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $484,350 loan, last year’s payment was $69 lower than this week’s payment of $2,443.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at  a zero point cost: A 15-year FHA (up to $431,250 in the Inland Empire, up to $484,350 in Los Angeles and Orange Counties) is at 3.50 percent, a 30-year FHA at 3.625 percent, a 15-year conventional at 3.625 percent, a 30-year at 4.125 percent, a 30-year FHA high-balance (from $484,351 to $726,525 in L.A. and Orange counties) at 4.0 percent, a 15-year conventional high-balance (also $484,351 to $726,525) at 3.875 percent, a 30-year high conventional high-balance at 4.375 percent, a 15-year jumbo (over $726,525) at 4.125 percent and a 30-year jumbo at 4.625 percent.

What I think: Forget the potentially skewed spike (federal workers being furloughed) in this week’s new unemployment claims. Rather, consider January data from Challenger, Gray & Christmas showing U.S.-based employers plan to cut almost 53,000 jobs — more than a 20 percent spike from last month’s data of employers cutting bait.

December home sales were down a whopping 10.3 percent from a year ago, according to the National Association of Realtors (and 20.3 percent in Southern California, according to CoreLogic).

And the “market time” – or the theoretical time needed to sell all the homes on the market – nearly doubled in Southern California to more than 4 months from 2 ½ months a year ago, according to Steven Thomas of Reports on Housing.

So, what do you do if you are eyeing a home to purchase but your departing residence, listed for sale, does not have an offer in sight?

Consider a bridge loan. Also known as a swing loan it’s a fast, generally easy but certainly more expensive way to extract pre-sale equity from your home to buy your up-leg abode.

Typically, swing loans are either second liens against your home or new first liens (must refinance any existing first into this loan), due in less than one year. There are no prepayment penalties, and the monthly repayment is interest-only (not principal and interest).

If you are getting a screaming deal on your up-leg or you don’t want to accept a fire-sale offer on your departing residence, then this tool can conceivably facilitate a significant net savings.

The three most impressive bridge loans that I found were:

1. With as little as 30 percent remaining home equity, extract 100 percent of the up-leg sales price in less than two weeks — effectively being able to compete with all cash buyers on this cross-collateralization mortgage (liens on both properties). The rate is 8.95 percent with total points of 3 to 4. Bridge loan deferred interest payments are also in play.
2. A new first with long-term financing at an interest rate of 6.99 percent for clean borrowers, requiring just 20 percent equity left on your departing residence. Zero closing costs for this loan.
3. Maximum 80 percent equity cash-out, no income or job needed, no qualifying, with credit scores accepted down to 620. The rate is about 9 percent with about 3 or 4 points cost. Primary homes, second homes, duplexes, triplexes and four-plexes all are acceptable. So are investment properties.

Let’s be very clear about the risk. Besides any monthly payment obligations between the properties, if you don’t pay the bridge lender back per the balloon payment due on the mortgage note, foreclosure is looking you squarely in the eye.

If you can’t cover the payments for X months, don’t do it.

In my 32 years as a mortgage broker, most sellers tend to have an inflated and less realistic sense of their homes’ value in comparison to their Realtors’ view. Look at the data. Look at sales trends. Don’t be greedy. Price realistically.