There are many different financing options for new homeowners, but what about existing homeowners who try to buy a different home? You can get a bridge loan.
Sure, bridge loan rates might seem scary at first glance. Yet, they’re actually rather useful for covering the time gap when you’ll (technically) own two homes simultaneously. A bridge loan is a secured loan, so you’ll have to put up something of comparable value to be used as collateral.
Suppose you’re completely unfamiliar with how bridge loans work. No worries. We’ve got you covered. Keep on reading for our full breakdown of all things bridge loans.
How Does a Bridge Loan Work?
Before we start exploring the nuances of bridge loans, let’s cover the basics of how it works.
Home sellers are in a good position to negotiate the best possible bargain in the present real estate market. They’re also less inclined to wait for a buyer to sell his current residence.
Thankfully, a bridge loan aids cash flow and enables a buyer to make an offer that is not dependent on the sale of a property, increasing the likelihood of the offer being accepted.
But, if you’re already eying a bridge loan, you’ll want a professional to take a look before you sign anything. Click for more information here.
The Two Types of Bridge Loans
Basically, it depends on how you’ll want to use your bridge loan.
If you can afford it entirely, you may borrow the down payment on the new home and then pay off two mortgages plus the bridging loan. With a larger bridge loan, you may be able to pay off your whole first mortgage as well as your down payment on the new home.
For the first several months, these loans usually don’t need monthly payments (or may have lower, interest-only ones). Instead, when you close on your sale, they’re typically repaid in full, including any accumulated interest if you haven’t been paying it as you go.
The Advantages of Getting a Bridge Loan
If you’re looking for perks, there are definitely many to getting a bridge loan, especially in a seller’s market. It can be the difference between buying your dream home and having to accept the second best.
In short, it gives you a new level of buying power. With one of these in your pocket, you’re free to sign a purchase agreement without contingency.
Even better, it can be rather affordable. Many bridge loans have no monthly payments. And others require only that you keep up with interest due. Of course, you have to pay back the borrowing. But you can do that out of the proceeds of the sale of your existing home.
The Perfect Time to Get Bridge Loans
Bridge loans, however, have higher interest rates and tighter borrower criteria. You may start by looking at other funding options.
Bridge loans, on the other hand, maybe just be what you need to purchase a new home in certain circumstances.
Borrowers who are having difficulty selling their existing property frequently utilize this kind of financing to purchase a new home.
Lenders may approve you in as little as two weeks, and you’ll have the funds you need to complete the transaction. In competitive property markets, having quick access to cash is particularly advantageous.
You may make an offer without a finance contingency using a bridge loan, which can help you obtain a house. Sellers are more likely to accept your offer than those who would only purchase if they can sell their houses first.
You may also utilize this kind of financing to pay for a portion of the cost of your new house. Assume you have sufficient funds to cover the bulk of the down payment.
However, you’ll need some additional cash to pay the remainder, as well as closing fees. The payback will be considerably simpler if you borrow a lesser sum.
Understanding Bridge Loan Rates
Bridge loans aren’t cheap. That’s because lenders recognize the risk involved when a borrower juggles multiple loans, especially if your existing home doesn’t sell quickly.
Interest rates for bridge loans are high: usually in the 6% to 10% range. And fees are similarly pricey. Expect to pay between 1.5% and 3% of the loan amount.
So, as always when you’re borrowing a big sum, shop around for your best deal.
Finally, be wary of any lender that requires you to pay fees upfront. They’re normally due when the entire loan becomes payable after you close on the sale of your existing home.
The Process of Getting a Bridge Loan
You have to be aware that bridge loans have high “underwriting” standards. That means you’ll need to be a creditworthy borrower with sound finances to qualify for one. This is because any lender will want to afford the payments on multiple simultaneous loans comfortably.
Of course, smart people make sure their finances are in the best shape possible before they begin to search for a new home. So you are likely already in a good position to apply and get approved by a bridge loan lender.
What Are the Alternatives to a Bridge Loan?
If you don’t have enough funds to go through the home purchasing process without a loan, and you couldn’t get a bridge loan, there are a couple of other options.
Those are either getting a HELOC or an 80-10-10 mortgage.
The HELOC is a home equity line of credit. Think of it as a kind of second mortgage. It may be less expensive (though not always) and more flexible. As for the 80-10-10 mortgage, it’s a great option if you have about 10% of your down payment saved.
You can borrow the other 10% to make a 20% down payment. This way, you’ll be able to avoid mortgage insurance.
Unlocking the Mortgage Bridge Loan
Going through having two homes on the books can be rather nerve-wracking, even for the calmest individual.
We hope that our explainer has shed some light on the intricacies of bridge loans and bridge loan rates. And, if you liked our article, you’ll definitely enjoy checking out our other tips and advice. You’ll find all of them available to you in our real estate section.