If you are trying to move into a new home before your current one sells, a bridge loan is a great way to do it. This loan will give you the cash you need to ease the real estate transition. In this article, we’ll briefly explain what you need to know about bridge loans.
Bridge Loan Defined
A bridge loan is a type of short-term financing that can meet cash flow needs during the time between the demand for cash and the availability of that cash. This type of loan is often used by individuals in real estate transactions. A bridge loan is used to “bridge the gap” if you’re trying to sell your current house and buy a new one at the same time.
Ideally, a seller will have their home under contract and use the proceeds from the sale of that property to purchase a new one. However, this isn’t always feasible- which is why we have bridge loans.
How do Bridge Loans Work?
There are several options for bridge loans. The two main ways they are packaged are as follows:
• Hold 2 loans
• Roll both into 1
The primary reason most buyers use bridge loans is so that they can put in a contingency-free offer on a new home. This is critical in a seller’s market when several buyers are vying for the same property. The seller is more likely to choose a contingency-free offer because they don’t have to depend on the buyer’s house to sell for the transaction to go through.
Also, it can give the buyer the funds to make a 20% down payment. Which can remove the requirement for private mortgage insurance. If a buyer doesn’t put at least 20% down, PMI is required, which increases the mortgage payment each month.
Finally, a bridge loan typically runs for 6 to 12 months.
How Much Can a Bridge Loan be For?
Terms vary from one lender to another- but cap at 80% of the home’s value.
Cost of Bridge Loans
A bridge loan can be helpful- but you will pay for it. Most of the time, the interest is higher on a bridge loan than on a conventional one. The reason is that the lender is aware that they are short-term loan products and they won’t be making money servicing the loan over the long term. They charge more up-front to make it worth their time to loan you the money.
In addition to a higher interest rate, you’ll be expected to pay closing costs and fees. Including appraisal fees, title policy, admin fees, notary services, and other fees, which your lender will explain. You will also be required to pay an origination fee based on the amount that you are borrowing. Typically, this is about 1% of the total amount.
While this may not sound like a big deal, keep in mind that most bridge loan terms are only up to 12 months. This means you’ll have to pay these fees again in the future when you get your new mortgage to replace the one that is paid off when your old home sells.
Of course, as mentioned a bridge loan can be helpful when you want to buy a new home but your current one has not sold. If you find yourself in this situation, here are some other potential options:
• Home Equity Line of Credit (HELOC)
• Home Equity Loans
• Personal Loan
• 80-10-10 Loan
Advantages of a Bridge Loan
The primary advantage is that you can place an offer on a new home without contingencies. This is important if you are in a competitive housing market. If your offer doesn’t have contingencies, the seller is more likely to choose yours when they have several offers on the table.
It also allows your family to move quickly. Such as if you need to relocate for a job or you just need to quickly change your housing.
Disadvantages of a Bridge Loan
As mentioned, a bridge loan can be expensive and the terms are much shorter, which can be stressful- especially if it takes longer than expected to sell your home. Even if you don’t expect to have any issues, unexpected events can complicate things. Another disadvantage is that not everyone can qualify. Finally, not every lender offers them. You might want to talk to the company that holds your primary mortgage and sees what they have to offer that can help. Â
Is a Bridge Loan a Good Option?
The truth is, there is no way to know for sure whether or not a bridge loan is appropriate for you. The only person that can answer that is you. You must consider your finances, your living situation, the overall economy, and more. Â
It can be a great way to help you over a tough spot. However, the high fees and interest rates make them much more expensive. If you are interested in learning more about a bridge loan option, contact Means Commercial Capital. We can help you weigh your options.
