When to Use a Gap Mortgage

• Purchasing real estate can be very time-sensitive, with new listings advertised and sold in a matter of weeks. Having the power, for instance, to purchase a second home before sale of a first home gives the buyer greater freedom in timing her purchase to take advantage of depressed prices. A seller may want to close the sale of his home without waiting for a potential buyer's home to sell, so a gap mortgage can open the door for the buyer to proceed with the purchase.
  
  

Mechanics of a Gap Mortgage

• As is the case with other mortgages, real estate serves to back a gap mortgage. Since this loan allows a homeowner to purchase a new home before selling her current home, the to-be-sold home is used to secure the loan. Two formats of gap loans exist, the difference being the amount of money the borrower accesses from the lender. The first format of gap loan provides advances sufficient to cover the balance of the mortgage on the first house and the down payment on the second. In this format, the homeowner need only make monthly payments for the mortgage on the new home, leaving the gap loan to be paid in full upon sale of the old home. The second format provides only enough loan advances to fund the down payment for the new home, but not enough to cover the outstanding mortgage on the first house. The homeowner carries the burden of two mortgage payments plus the balance on the gap loan. Paying off the balances on the old mortgage and gap mortgage occurs upon sale of the old home.
  
  

Cost

• The interest charged on a gap mortgage is higher than that charged on a standard mortgage, due largely to the increased risk assumed by the lender. In addition to an increased interest rate, the borrower must also pay closing costs and origination fees on the gap loan totaling thousands of dollars. Furthermore, most lenders will not approve a gap loan without an agreement to finance the new mortgage as well.
  
  

Considerations

• Before obtaining a gap mortgage, the borrower should consider the potential sales price of his current home and the likelihood of selling the home in the near future. Closing and origination fees might cancel a potential profit of immediate purchase of a new home, so these costs merit consideration. Also, if the gap loan format only accounts for the down payment on the second home, the homeowner should be confident of his ability to make two regular mortgage payments.