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Reader Question: Bridge Financing

by Ram Balakrishnan
April 4, 2007
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JM, from Edmonton, sent the following question:

Home-buying season is upon us, and I have a few questions. How are interest costs calculated (i.e. mortgage vs. secured line of credit)?

I am going to need some bridge financing; do you have any idea what sort of rates there are for this? Is there anything special about bridge financing, or is it just like any other loan?

I’ll tackle the difference between a mortgage and secured line of credit (SLOC) first. In a typical mortgage, every payment has two components: interest and principal. The principal payment reduces your mortgage balance and over time the portion of your payment that goes toward the interest decreases. A mortgage will typically have pre-payment privileges but you won’t be able to pay off the entire loan without incurring penalties. A SLOC is just a loan, typically at the prevailing prime rate, secured by your home. You only have to pay the monthly interest on the loan but you can choose to pay off the principal, in part or in full at any time. If you choose a variable rate mortgage, you will get usually get a discount off the prime rate but a SLOC is almost always at prime.

I haven’t personally done a bridge financing, so I am sure of the implications of taking a loan from the LOC secured by the old house. I would definitely suggest that you talk to your local bank to see what options you have. If you have enough equity in the old house for a down payment on the new one, you should be able to arrange a bridge financing. Our readers might have opinions, comments or suggestions on your question.

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