Have you been thinking of selling your house to buy a new one and not having enough funds? A bridge loan is what you need to have you covered for the entire exercise. Imagine a situation whereby you sell your house at a price that is not enough to pay for your new house. You will need extra funding to buy the new house in such a case. The good news is that bridge loans will have you covered to ensure you buy your dream house. If you need to buy a new home or move to a different house, the question you need to ask yourself is, “what is a bridge loan?”.
Bridge Loan’s Pros and Cons
A bridge loan is defined as a long-term loan made to facilitate a transition period, such as changing houses. If you are a homeowner faced with the need for a sudden transition, you will need a bridge loan to make the transition smooth. There are many reasons why people would need to change houses. For instance, you might be required to change jobs in different cities or might need to buy a larger or smaller home. People do not have money set aside for such sudden changes in some cases. Hence, a bridge loan would help facilitate the transition.
A bridge loan is secured by your current home as the collateral. Such is the same case for mortgage loans. But you need to know that bridge loans are not a substitute for mortgage loans. The main characteristic of bridge loans is that they are short-term loans. Made to be paid within six months to three years. Before you decide to get a bridge loan, it is important to know about the following pros and cons to ensure you make the right decision.
Pros of Bridge Loans
Before you decide to finance your moving or purchase of a new home using bridge loans, you need to ensure that you are making the right choice. If you are not sure how to repay the loan, it should not be your ideal option. The following are some examples of advantages of bridge loans that will make you consider them.
Cash in Hand
The main advantage of bridge loans is that you will get the cash immediately. This means the money can be compared to cash in hand that can be used to sort the current issue associated with moving or buying a new home. It is the ideal option for financing time-sensitive transactions. For instance, if you need to start a new job in another town, you might only have a few weeks to move. Therefore, the bridge loan will provide you with cash to use in facilitating the moving exercise. Without such a loan, it would be difficult for you to get ready cash that will help in your moving.
Fast Financing
Are you seeking a home bridge financing option that will provide you with the ready cash the soonest as possible? Bridge loans are your best option. These loans are issued as soon as you apply for them because the financing institutions understand their agency. They are an ideal option as compared to the traditional bank loans that would take days before being approved. If you plan to take traditional bank loans, you can be assured that they will not serve your intended purpose because you deal with a time-sensitive transaction.
Payment Flexibility
The beauty of taking a loan is being able to repay it as expected. You risk damaging your credit score when you default on a loan payment. The lower your credit score is, the lower the chances of getting reliable loan amounts in the future. Therefore, before taking a loan, you need to be assured that you can repay it on time. Bridge loans have flexible repayment options such as interest-only payments and deferred payments until the current home is sold. Such flexibility highly reduces your chances of defaulting the loan, thus making bridge loans your ideal option in home bridge financing time-sensitive transactions.
Bridge Loans do not Need Contingency
When people need to sell their home to buy a new one, they will wait for the old home to sell to get funds for paying for the new home. This can be time-consuming, and the plan might not always go as planned.
Your current home might sell at a very low price, making it nearly impossible for you to afford the new home. In other cases, you might need to move to the new home the soonest as possible. Yet you have not found a seller for your current home. In such a case, a bridge loan would be of great help because it does not require you to place a contingency on purchasing the new home. The loan will offer you the finances you need to pay for your new home. And therefore, you do not have to wait for the current home to sell for you to move.
What is a Bridge Loan Cons?
Bridge loans are an ideal option for an individual seeking to have a time-sensitive transaction. This does not mean that you should take the loan because they also have their disadvantages. The Loans store of Goalry provides people with the advice to know before engaging in any financial obligation. The following are some of the cons you need to consider about bridge loans to ensure you make the right choice.
Conventional Down Payment
A substantial number of lenders will require the homeowner to have at least 20% home equity in the current home before they can offer you a bridge loan. Therefore, if you do not have this amount, it means you will not be eligible for the loans. Such is unlike traditional loans, which will only require you to have collateral for the loan being offered. In that case, you can offer your property as collateral and still get the loan to finance your move or plan of buying a new home.
Higher Rates
Bridge loans require people to pay a high amount of interest rate than traditional loans. These loans are easy to get, and therefore, one has to pay more to get them. They are made to finance time-sensitive transitions that do not allow people to wait for traditional loans to process. If you have time to seek a better loan option, bridge loans might not be your ideal option. At the end of the repayment period, you will have paid more money than what you could have paid in the case of traditional bank loans.
The interest rate for bridge loans usually range between 6% and 10%.
Double Home Management
If you plan on selling a home to buy a new one, a bridge loan can enable you to buy a new home before selling the old home. This means you will own two homes that need maintenance. The cost of maintaining two homes is high. And therefore, you will have to incur extra costs at the expense of a bridge loan. However, these costs would last as soon as you sell the old home. Once an individual has gotten a bridge loan, they are advised to work their level best in finding a buyer for their old home to cut on the extra maintenance costs.
Financial Requirements
Some of the bridge loan lenders in the market will give you certain conditions before deciding to lend you the money. Some of these terms might not be among your preferences. For instance, the lender might require you to use their mortgage services for your new home in order to qualify for the bridge loan. The mortgage rates vary from one company to another. Their rates might be higher than those of the other companies you had identified. In such a case, you have to decide whether to get a mortgage at a higher rate or forgo the bridge loan.
How Much do Bridge Loans Cost?
If you are reading this section, it means that you have decided to consider the option of bridge loans. Therefore, the next step is to know how much it will cost you to take this loan. This decision will depend on whether you are able to repay the loan or not.
If you decide to get a bridge loan, you should be prepared to pay a higher interest rate than a conventional mortgage or traditional bank loan. The current interest rates for bridge loans begin at 3.25%. This rate will increase depending on your creditworthiness. If you have bad credit, you are likely to get this loan at a higher interest rate than an individual with a good credit rate.
You should also consider the closing rate for the bridge loan. In most cases, this rate is usually 2% or 3%. The closing rate could involve property-related fees and mortgage-related fees. It is important to get clear information about these costs from your lender before you decide to take the loan. This is advisable because the closing costs will vary from one lender to another and from one location to another.
When to Consider Taking a Bridge Loan?
As mentioned above, a bridge loan is made to service time-sensitive transactions. Therefore, they are the ideal loans to pick whenever you want to change houses or move abruptly. The following are some scenarios that should have you consider bridge loans instead of the traditional banks’ loans that are slow to process.
- If you have found a new home and the seller will not accept a contingency offer for you to sell your current home, a bridge loan would be ideal.
- If you cannot raise the down payment for buying a new home, not unless you sell the current home, a bridge loan will have you covered. In some cases, it becomes challenging to find a buyer for the old home, and this can delay your plans for buying a new home.
- If the closing date for the current home is set after the settlement for the new home, you will not have the anticipated money to pay for the new home. In such a case, a bridge loan will help instead of seeking a different client (which is not easy to find) to buy the current home at a closing date before your settlement for the new home.
- If you have already found a new home in a seller’s market that would sell the home to another buyer, a bridge loan will help you close the deal the soonest possible before the home has been sold to someone else. Finding the perfect home can be challenging, and therefore, it is important to purchase what you have identified the soonest as possible.
What are the Alternatives for Bridge Loans?
Do you feel like a bridge loan is too costly for you? The good news is that you can still get to move or sell your home without taking a bridge loan. Let us explore some of the alternatives to bridge loans that you should consider when shipping for new homes or planning to move.
HELOC stands for a home equity line of credit and cats like a credit card. The interest money for this loan is only charged if you access the money. Therefore, if you do not access it, the amount will not accrue any interest rates. The best part about this loan is that it has a lower interest rate than bridge loans. The only disadvantage is that you will not be eligible for this loan if you plan on selling your current home.
This type of loan will require to put down 10% to finance two mortgages. The first mortgage will be financed by 80% of your purchase price. The remaining 10% will be for your second loan. This bridge loan alternative is ideal for financing your new home. It will allow you to pay the second mortgage once your current home has been sold.
If you know the exact amount of money you should borrow to pay as a down payment for your new home, a home equity loan is the ideal option. This type of loan provides you with a lump sum amount of money that is borrowed against your current home’s equity. The best part about these loans is that they are long-term loans, thus offering you enough time to pay a small amount for each installment. The loan repayment period can be as many as 20 years and would have more favorable interest rates as compared to the bridge loans.
This type of loan will work like HELOC because it accrues interest only on the withdrawn money. The loan terms for a business line of credit will vary from one lender to another. Therefore, if you are considering taking this type of loan, you need to research the market to identify the lender that will offer you a loan at favorable terms. Its repayment period can go up to 10 years. The business of line loans also has a higher interest rate that bridge loans are difficult to find. They are most ideal for business owners.
If you have a favorable DTI and good credit, you will most likely get approved for personal loans with better interest rates than those of bridge loans. The terms and conditions of these loans will vary from one lender to another. These terms include collateral, interest rates, and the repayment period. Therefore, you should shop around to get a loan with the most favorable terms.
If you plan on using this loan, you need to ensure that you have a good credit score. If your credits score is low, you are likely to get loans at high-interest rates and short repayment terms. You are also likely to get a small amount of loan, which will not help your transitioning process.
Bottom Line
There are many lenders in the market offering people bridge loans to make their transitions smooth. If you plan on moving to a new city or buying a new home, a bridge loan is what you need to facilitate the process. The interest rates for such homes can be higher than the conventional or traditional bank loans. In such a case, you have to consider your urgency for the loan to ensure you make the right choices. You also do not want to take a loan that will leave you in a financial crisis because there are plenty of loan options in the market. “What is a bridge loan?” is the question you need to ask yourself whenever you think of home bridging financing. This question will offer you all the details you need to know about bridge loans to ensure you make the right financial choice.
Getting a bridge loan might seem like an ideal option if you are selling a home to buy a new one. However, such a loan might put you into a financial crisis, making it challenging for you to manage your finances after buying the new home. Therefore, the ideal options are to wait for your current home to sell before settling the deal for your new home. This will ensure you have enough finances to pay for the new home and will not need to take any loans.
William Vinson has been a professional writer for more than 35 years. He is also a seasoned financial professional and raised significant capital for the startup of over 30 companies. He has expertise in real estate, insurance, financial planning, and investment management. He wrote thousands of articles for publication on major websites. All of his earnings from writing are used to support the charitable efforts of the Willivision Foundation that helps the elderly and does animal rescue.