Most consumers don’t use bridge loans because they aren’t necessary during housing booms and hot markets. For example, if your home goes on the market and sells within a month, it’s typically not necessary to take out a bridge loan. But now that things have cooled off, they may become a bit more common as sellers experience more difficulty in unloading their homes.
A “bridge loan” is basically a short term loan taken out by a borrower against their current property to finance the purchase of a new property. It’s typically good for a six month period, but can extend up to 12 months. Most bridge loans carry an interest rate roughly 2% above the average fixed-rate product plus closing costs.
Bridge loans are generally taken out when a borrower is looking to upgrade to a bigger home, and haven’t yet sold their current home. A bridge loan essentially “bridges the gap” between the time the old property is sold and the new property is purchased.
Home Buying Contingencies
Many purchase contracts have contingencies that allow the buyer to agree to the terms only if certain actions occur. For example, a buyer may not have to go through with the purchase of the new home they are in contract for unless they’re able to sell their old home first. This gives the buyer protection in the event no one buys their home, or if nobody is willing to buy the property at the terms they desire.
How Do Bridge Loans Work?
A bridge loan is normally structured so it completely pays off the existing liens on the current property and uses the excess equity as down payment for the new home. Or, if there is not a mortgage on your home the loan would go toward paying for the new home. You likely won’t make monthly payments on your bridge loan, but instead you’ll make mortgage payments on your new home. And once your old house sells, you’ll use the proceeds to pay off the bridge loan, including the associated interest and remaining balance.
Most consumers don’t use bridge loans because they aren’t necessary during housing booms and hot markets. For example, if your home goes on the market and sells within a month, it’s typically not necessary to take out a bridge loan. But now that things have cooled off, they may become a bit more common as sellers experience more difficulty in unloading their homes.
Bridge Loans Can Be Risky
Many critics find bridge loans to be risky, as the borrower essentially takes on a new loan with a higher interest rate and no guarantee the old property will sell within the allotted life of the bridge loan. However, borrowers usually doesn’t need to pay interest in remaining months if their home is sold before the term of the bridge loan is complete. Make sure you do plenty of research before selling your home to see what asking prices are and how long homes are generally listed before they’re ultimately sold. The market may be strong enough so that you don’t need a bridge loan. But if you do need one, be aware that a home could go unsold for six months, or longer, so negotiate terms that allow for an extension to the bridge loan if necessary.
If you think a bridge loan is right for you, try to work out a deal with a single lender that provides both your bridge loan and long-term mortgage. Usually they’ll give you a better deal, and a safety net as opposed to going with two different banks or lenders. Contact Renee for a list of reliable “bridge loan” lenders.
Also keep in mind that there are other alternatives to a bridge loan such as financing down payments with your 401k, stocks, and other assets. Remember to compare each scenario before making a decision.
Published on 2017-08-22 15:12:38
