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What is Bridge Financing? If your new home closes before the one you are selling, you'll probably need bridge financing. Here's how it works. Bridge financing is used as temporary funds to cover the cost of your new home if the sale of your current home isn't complete by the time your new home's purchase is complete.
Lenders can utilize the equity in the current home without having to refinance it to get the equity for the mortgage on the new home.
How this can help?
If a seller has a firm offer but the closing date isn’t for example for 3 months, and they have purchased a new home which that seller wants to close in one month. This is a perfect situation to use bridge financing.
What the lenders can do is set up a new mortgage, using the equity from their existing home as a guarantee and close on the new property up to 90 days earlier than when they sell their property.
Best Residential Rates for Feb.2,2012 Best Rates (%) Update Mortgage News: Rising Interest Rates & You! Fixed vs. Variable - The Age-Old Question Canadian mortgage holders and new home buyers have enjoyed a long period of low interest rates. The experts anticipate that rates are likely to rise, not in a dramatic way, but in small increments over the next year and a half. Naturally, homeowners with variable-rate mortgages will want to know if they should lock into a fixed rate. Whether to go fixed or variable is one of the most common questions mortgage brokers are asked. To answer that question, let's take a look at interest rates in general. There are two different types of interest rates: the Prime interest rate and fixed rates (or long-term rates). The Prime interest rate, which the Bank of Canada (BoC) controls, is what gives us our variable interest rate. The focus of the BoC is on stimulating the economy and keeping the inflation rate low. The best way to stimulate the economy is to get people to spend money, thus, the low interest rate. Now that the economy is nearing full recovery, inflation can become an issue, so to keep it in check the BoC may start to raise the prime interest rate. This is the rate the banks pay to borrow money. Fixed rates, on the other hand, are based on the bond markets and although what the BoC does with the prime rate has an impact on the fixed rates, the two act independently of each other. The Bond market, like all markets fluctuate daily. So the challenge for homeowners is to look at the rates in rational manner and not overreact to the headlines. Is the best advice to lock in to fixed rate? The simple answer is: It all depends. Most homeowners choose a fixed rate because they know exactly how much principal and interest they pay on each regular mortgage payment throughout the term. However, when interest rates go down, they can't take advantage of that to save money on interest. Variable rates are the most popular choice among homeowners between the ages of 35 and 44 according to a recent report from Canadian Association of Accredited Mortgage Professional (CAAMP). While there is always a risk that interest rates will fluctuate, there are other factors to consider. The greatest advantage is the long-term savings on interest costs. Dr. Moshe Milevsky, Associate Professor of Finance at York University examined mortgage rate data from 1950 to 2007 and found that by choosing a variable rate mortgage, Canadians saved $20,000 in interest payments over 15 years, based on a $100,000 mortgage. At that time, homeowners were better off with a variable rate mortgage than a fixed rate mortgage 89% of the time. Here is the link to his entire report: http://www.ifid.ca/pdf_workingpapers/WP2001A.pdf On a five-year fixed rate mortgage term, monthly payments are approx. $1412.05. With the variable rate mortgage, payments are $954.78. Making everything equal, let's increase the monthly payment on the variable rate to match the fixed rate payments. The difference between $1,412.05 and $954.78 is $457.27 at the beginning of the term. This difference is applied right to the principal balance. By the end of the five-year term, assuming Prime increases 0.25% every quarter for 5 years to 6%, the variable rate borrower reduced their principal balance an additional $16,608.17.
So, should you take the variable or the fixed rate? Once again, it all depends. It depends on how well you sleep at night. If you can't because you're worried about the risks of a variable mortgage, then a fixed rate is best for you. There are other ways to reduce the principal of your mortgage loan without going to a variable rate - speak to me to find out additional strategies for reducing interest rate costs over the lifetime of your mortgage.
Lower inflation in February likely to keep interest rates low
The homebuyer's dilemma: short-term or long? When finances are tight, it's good to plan ahead and have a clear idea of what your future expenditures will be. One of the standard ways to plan a budget is to base your monthly expenditures on your mortgage payment and fit other expenses around that. A fixed-rate mortgage gives you set monthly payments for anything from one to 10 years, allowing for a stable financial plan. There are currently five-year deals available at about 4%. On the other hand, if you are strictly looking for the lowest payment possible and feel you are able to tolerate the risk of a future rate rise, then you may choose a variable rate. "The lowest variable is prime [2.25%] plus 0.3% and it goes up to prime plus 0.6%. It's so low that it's only going to eventually go up," says Paula Roberts, a mortgage broker for Mortgage Intelligence in Unionville. "What's most important is if clients want to take advantage of the prime plus, say, 0.5%, they need to be prepared that if prime goes up to 4%, their rate goes up to 4.5%." The Bank of Canada has signaled it is likely to keep rates unchanged until June 2010. This means an existing variable deal linked to prime is stable for the time being, but rates on new fixed-term deals (which are based on bond yields rather than prime) are rising. "It does make the decision a little bit difficult ... where one is apparently locked for at least another 11 months and the other one is slowly creeping up," says Michael Gregory, senior economist at BMO Capital Markets. "The differential has become quite wide ... so you are paying what would appear to be a pretty hefty insurance premium[if you choose a fixed rate] to guard against higher variable-rate mortgages." Both Ms. Roberts and Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals ( caamp.org),recommend checking the fine print on a new variable mortgage to ensure it permits you to lock in at a fixed rate when variable rates start to rise. For refinancing an existing mortgage, Mr. Murphy cautions that the penalty for an early payout will likely outweigh any gains in reduced interest. "If you're only in the first year or even the second year of a mortgage ... generally speaking, the penalty is going to be much higher," says Mr. Murphy. "You've really got to sharpen your pencil and do the math and make sure that you're getting an advantage." Penalties are generally three months' worth of interest payments or the interest rate differential on the balance, but check the fine print. And the decision to switch also depends on where in your current mortgage term you are. Ms. Roberts says clients who have less than $100,000 to pay off may be more tolerant of rate rises than a client who is at, say, the start of paying off a $400,000 loan and may want to lock into a predictable fixed rate. Ms. Roberts recommends that, if you do sign on to a new variable rate mortgage, you set your payments as if they were at a fixed rate of, say, 5%. "More money is going to principal, and when you lock in at 4.5%, it's no shock to your payment," says Ms. Roberts. "The last thing anybody wants is to have to sell their house because they can't afford it." As for deciding the best moment to lock in? There are no easy answers. "There's been a lot of stimulus. Maybe we will have inflation problems, in which case central banks will have to raise rates quickly and aggressively to try to cool that," says Mr. Gregory. "That is one risk you'll face with certain variable rates. It's definitely a hard choice for consumers." See the history of mortgage rates from 1950-2007
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