As the name suggests, Bridge Loans offer a short-term loan or “bridge” that allows borrowers to purchase new real estate property by using the home they currently own as collateral.
A bridge loan is definitely worth considering for borrowers who are trying to buy and sell a home at the same time: for those of you looking for a short-term loan for an investment property, this may be the best solution.
We can finance property acquisition and up to 100% renovation cost.
Also called a “wrap” or “gap financing,” bridge loans are a lifeline for home buyers who are eager to purchase new digs before they’ve sold the home they’re currently in.
It also gives you the time and opportunity to increase your FICO score and improve your DTI (Debt To Income ratio).
A bridge loan is a type of short-term loan which is used by an individual or company as they secure permanent financing or deal with an existing obligation. It provides immediate cash flow to allow short term obligations to be met. These loans have high interest rates and usually, go up to one year since they are short term.
Typically, for a bridge loan, you can finance up to 80% of the combined value of both homes.
If you’re selling a home for $200,000.00 and buying another one for $300,000.00 you can borrow $400,000.00 max.
As for the rest (in this case, $100,000.00), you’ll need that handy either in home equity, savings for a down payment, or some combination of the two.
Once your home sells, you pay off the bridge loan and then apply for a new longer-term mortgage with a more favorable interest rate to refinance just your new home.
Bridge loans typically take a shorter time to process than conventional loans (a couple of weeks versus a few months) and are meant to be short-term solutions (often three months to a year). However, since lenders can’t make much money in interest in such a short time, they typically charge borrowers a higher interest rate and fees than lenders would on a standard home loan.
In the current market, lenders charge bridge loan interest rates in the range of 6% to 16%. You may be able to find lenders that offer an interest-only, fixed-rate loan for the length of time you need bridge financing.
With interest rates like that, the idea is to pay off the bridge loan as quickly as possible, as soon as you sell your previous real estate. That said, some lenders have a prepayment penalty while others don’t, so do make sure to read the fine print.
Lenders may charge borrowers substantial origination fees on bridge loans—consider it the price you pay for the convenience of getting a short-term loan.
Whether you should get a bridge loan or not, really depends on the market you’re in.
As a general rule, it’s a good gamble if your home is situated in a hot seller’s market, where you are reasonably assured that it will sell in a short time.
If you’re in a seller’s market, it’s generally fine to buy a new house, and then sell your old one.
However, if you’re in a buyer’s market, where your home might sit on the market for months or years, it’s much wiser to sell your house and rent something for a short period of time until you find another home you love.
Yes, that means you’ll have to move twice—once into your rental, then once again after you buy a home—but that hassle will pale in comparison to the stress you’ll face when the clock is ticking and you’re making mortgage payments on a bridge loan.
So make sure you’re a good candidate before you go out on this limb.