Overview: Bridge Loan Financing & Rates Guide | What You Need to Know about Bridge Loans
You found a home you love. You are all set to jump right in and buy it. There is only one major problem: your current home is not on the market yet. How will you afford to buy another home if you do not have the money from your first home? This is where a type of loan called bridge financing comes into play.
Although many real estate experts believe the best financial step is to sell your current home before you buy another, this is not always the most practical. Sometimes you find your dream home before letting go of your current one. A home bridge loan can allow you to have some flexibility in case this happens.
This guide will walk you through the bridge lending process, the pros and cons of using a bridge loan, and how to find the best rates from bridge loan lenders.
What Is a Bridge Loan?
A bridge mortgage can help you finance a new home or property before selling your current one. Bridge financing is available for individuals or businesses alike. A home bridge loan does not differ much from commercial bridge loans except for the amount financed and, therefore, the term of the loan.
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A real estate bridge loan is somewhat comparable to a home equity line of credit in that it is often used for similar reasons. They can both be used as a type of gap funding for buying a new property. However, lenders typically do not fund home equity loans if a home is already on the market.
This is where a mortgage bridge loan can fill in the gap. Bridge loan lenders issue temporary funds to a buyer to use as a down payment on the new home or property. This gives the buyer more time to sell without the possibility of losing the new property before he can obtain financing.
Who Uses a Real Estate Bridge Loan?
A bridge mortgage can be an option for both individuals and businesses looking to sell and purchase property. However, the need for a bridge loan could be especially vital to a business looking to move its location.
Commercial bridge loans can help a business move from one location to another without a gap in its locations’ availability. Commercial properties can have strict lending requirements that create difficulty in obtaining financing, especially when the business is between two properties. Commercial bridge loans provide short-term financing for businesses struggling to obtain immediate long-term financing for a new property until its current property sells.
Still, individuals prefer a bridge loan mortgage to help lessen the financial gap between selling their current home and buying a new one.
Often, closing dates on a current home and new home do not align as conveniently as homeowners need them to. An owner could have an offer in place on his current property, but it takes time to close. Bridge loan financing can help homeowners lock in an offer for a new home as they wait for their current home to sell.
How Does Bridge Loan Financing Work?
A bridge loan mortgage is a short-term solution to help provide the financing in between the selling and buying process. There are typically a few qualifications to qualify for a bridge mortgage:
- You should have an offer placed on your current home. Most mortgage bridge loan lenders will want to see a promising offer for the home or property you are selling. This shows the lender an estimated time frame for when the property will sell and how soon it can expect its money back.
- You should meet certain income and credit requirements. As with most types of lending, bridge lending comes with income and credit requirements that vary by lender. Lenders want to ensure that you will be able to pay them back in a timely manner.
- You should have a certain amount of equity in your home. This also varies by lender. Your home bridge loan is borrowed against the equity of your current home and serves as the basis for calculating the amount of bridge financing you can receive.
To obtain a bridge loan, your lender will want to know the date you expect to close on your current property, the date you are scheduled to close on your new property, and the financial figures for selling and buying the two properties.
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You should figure your net payment from selling your home, the cost of buying the new home, plus closing costs and repairs, and find the difference between the two. This will be the amount you will need for your mortgage bridge loan.
Bridge financing lenders may also ask you to use any other lines of credit you might have to lower the cost of the bridge loan. You also might not qualify for the full bridge funding you need if you do not yet have enough home equity built up.
Overview of Bridge Loan Rates and Fees
Bridge loan rates can be as much as 2% above traditional mortgage and loan rates. Since bridge lending is a short-term option for financing, many lenders offer the loans with higher interest rates and costly fees. Unfortunately, owners are quick to sign off on the terms because their immediate need for funding outweighs the added costs.
Bridge financing can also come with the following additional costs and fees, depending on the lender:
- Closing costs, which can reach into the thousands
- Loan origination fee, which is a percentage of the loan amount
- Administration, title and notary fees
- Fees for wire transfer of the funds
- Appraisal fees
As you can see, a real estate bridge loan can be a pricey option, but for some home and business owners, it is the only option. Bridge loan rates vary significantly between lenders, and if you choose this type of financing, you should be sure to thoroughly research the terms each lender has in place.
Benefits of a Bridge Loan Mortgage
As with all types of mortgages, a bridge loan mortgage carries benefits and drawbacks. This type of funding may not be the right choice for all home and business owners. Bridge loan lenders should have very clear terms outlined for prospective borrowers before the borrower decides to apply for a bridge loan.
Here are some reasons home and business owners choose to secure bridge financing to purchase a new property:
- The ability to simultaneously sell and purchase a property. Not all finance options offer owners the flexibility to both sell their current property while searching for another. Unless an owner has the ability to immediately obtain another mortgage once he finds a new property to buy, a home bridge loan can give him the short-term funding he needs to make a down payment while he waits for the current property to sell.
- It is a short-term financing option. A bridge loan is typically financed for less than a year or until your current home sells, whichever comes first. This financing provides owners with a quick funding option that they can pay back quickly without much hassle.
- Bridge financing is a time-saver. Not only does a lender usually release home bridge loan funds quickly, but the application process is quicker than other financing options. This is because not as much information or requirements are necessary to obtain a bridge loan. Additionally, this extra financing provides you with more flexibility to move into your new home when you choose because you will still have your current property available.
Drawbacks of Bridge Financing
There are many benefits to bridge lending, but this financing also comes with several risks. The following drawbacks should carefully be considered before deciding on the best finance option for your new home or property:
- Your home may not sell before the bridge loan term expires. If you choose bridge financing, you are locking yourself into a specific length of time to sell your current home. If your home does not sell before the loan term expires, you might have to ask for an extension, or you could lose your financing completely. You could even run the risk of the bank foreclosing on your property.
- Rates are high, and terms can vary. The terms for bridge funding vary greatly between bridge loan lenders. All lenders outline their own loan lengths, rates, and fees. Some lenders may see bridge financing as an opportunity to take advantage of those in need of a quick financing solution. Therefore, they choose to have exceptionally high interest rates and fees, which can be a potential burden to borrowers.
- You will be paying for two mortgages plus a bridge loan. If you choose to turn to bridge loan financing to purchase a new home or property, you are likely doing so because you need immediate financial help. However, does your immediate need outweigh the additional monthly cost? You will now be paying for your old mortgage, your new mortgage, and your bridge loan payments. If you cannot afford high monthly payments, bridge funding is not your best choice.
If, after learning the pros and cons of bridge financing, you believe this is a good finance option for you, you will benefit from learning how to find the best bridge loan rates.
Finding the Best Bridge Loan Rates
As with most financial options, you can find plentiful information on the web to help you decide how much money you need to borrow and the long-term financial effects your finance option will have on you. If you are considering a bridge loan, you can research the best rates by visiting the websites of specific lenders, reading online lender reviews or using a bridge loan calculator.
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A free calculator can help you compare the terms of bridge loan lenders to learn what offer will be the best for your current financial situation.
In the example above, a bridge loan amount of $45,000 with an interest rate of 8% and a 12-month term would give you a monthly payment of $3,914.48. However, if you were to sell your home before the 12-month period, you can use the proceeds to pay off your bridge loan.
The best way to compare bridge financing terms is to contact lenders directly. It is possible that lenders can provide you with custom terms depending on your current situation and ability to pay. Be honest with prospective lenders, and you could find a bridge loan with competitive rates.
Conclusion: Bridge Loan Financing
There are many points to consider when choosing the best finance option for you. Bridge financing is not the best choice for everyone, but it absolutely can help you afford your dream home or property without risking losing it because of inability to afford a down payment.
Still, you should take into consideration the risks associated with a bridge mortgage, such as higher rates and possible foreclosure should you not meet the deadline to sell.
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