The real estate market is constantly evolving beast. As the market changes, so do the types of products available. One of the so-called “special” loans are increasingly popular is the “bridge loan.” However, before doing this type of loan, it is important to know the basics. And more importantly, the best fit for this group.
So, with that being said, what exactly is a bridge loan and what it can do for you?
Bridge loans are short term loans only used by an individual (or business) that need fast cash infusion until permanent financing can be achieved. Bridge loans, sometimes referred to as a swing loan or gap financing, are generally expected to be paid back very quickly. Most of the bridge loan has a term of six months to a year.
When someone needs a bridge loan?
Bridges loans are often used by prospective home buyers are ready to buy, but who have not sold their current home. When the booming housing market and homes that sell within a few days or weeks that are listed, the bridge loan is not unreasonable. But what about those times when the housing market seems to be moving along at a pace that makes more sense?
Imagine, for example, that you find your dream home. You really want to buy it, except for one major setback: you have to sell your current home first. In the meantime, you can grab that dream house by applying for a bridge loan. Bridge loans can allow you to pay the mortgage on your current home, or earn enough money to make a down payment home of your dreams while you wait for your current home to sell. In hindsight, the opposite situation would be ideal: selling your home, and then find your dream home. But since life, and especially personal finances, it is not always ideal; a bridge loan is an option for those who find themselves caught in between.
Terms of the bridge loan may vary. Some types of bridge loan allow you to actually pay your mortgage current. Pretty typical bridge loan might work as follows: Bridge loans are used to pay your mortgage current, and the rest of the money is used to make a down payment of your new home. In this type of scenario, closing costs and prepaid interesting six months is usually deducted from the loan amount. If the first house is not sold after a period of six months, the borrower is usually allowed to begin making interest-only payments on the bridge loan. When the first home is sold, the bridge loan can be paid in whole, to any deferred interest payments credited to the borrower.
Be warned that the bridge loan used in this way – to span the gap between the two separate transactions – can be costly. Bridge loans often come with high costs, so make sure you understand the terms of your loan before signing. Also, be prepared to face the possibility of having to pay the equivalent to three mortgage payments (your current home, new home, and the loan amount itself) until your home is sold. Even before considering a bridge loan, speak with a real estate agent. Find out how long the home in the price range of your home takes to sell. If the housing market is so slow that you expect your house remains unsold for months, the bridge loan is not probably a good idea.
Bridge loans are also commonly used in real estate investing. Individuals who are interested in investing in real estate property, but who may not have access to conventional loans, can use a bridge loan to make the purchase. Individuals who use the bridge loan may not qualify for conventional loans because of credit problems. Thus, many bridge loans are often available through non-traditional lenders, which offer interest rates ranging from 14 to 20 percent. These lenders often charge ‘points’, or the cost of the loan. One point is one percent of the total loan amount. Because these lenders are not concerned with credit ratings as a traditional lender, a bridge loan is much more accessible, although it is also more expensive.
Bridge loans offer a quick and relatively easy to receive a fast cash infusion. But they are also saddled with higher than average fees and interest. The best advice regarding the bridge loan is also possible simple: do not use it unless you absolutely have to.