A gap mortgage is a temporary loan, normally used between the end of loans taken out to develop a property and the start of the permanent mortgage loan. Also known as a "bridge" or "swing" loan, a gap mortgage covers the transition period between the sale of a previous home and the purchase of a new home. Because these loans have relatively short terms, the interest rates on gap mortgages are often higher than the rate for the permanent mortgage.
Gap Mortgage Types
The gap mortgage comes in two similar formats. The first type covers both the down payment on the new property and the balance of the mortgage on the previous property. When the sale on the previous property closes, the owner uses that amount to pay off the gap mortgage. The other format only covers the down payment on the new property. The owner then pays off both the gap mortgage and the balance of the previous mortgage with the proceeds from the sale.
Gap Mortgage Functions
A gap mortgage serves multiple purposes for buyers and sellers. For instance, a commercial property developer may get a gap mortgage to reach the full amount of a mortgage for a property that is not at full occupancy. If a developer has a "floor loan" of $750,000 on a property, but needs a total of $1 million until the property reaches full occupancy, the developer can take out a "gap mortgage" of $250,000 to cover the shortfall.
Gap Mortgage Advantages
A major advantage of the gap mortgage is that it allows buyers to take advantage of time-sensitive shifts in the real estate market. A gap mortgage gives the buyer the means to purchase a new property before the sale closes on the previous building. If buyers had to wait until the sale closed on the previous property before purchasing the new one, they could miss out on favorable fluctuations in purchase price and interest rates on the new mortgage.
Gap Mortgage Drawbacks
The two most notable drawbacks to gap mortgages are lack of availability and high fees. Many lenders will not authorize a gap mortgage without an agreement in place with the buyer for the new mortgage. If the buyer qualifies for the gap mortgage loan, the buyer will pay higher interest rates, closing costs and origination fees on that loan. Buyers should consider how quickly the sale of their previous property will close before taking out a gap mortgage.
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