Are you planning to sell your house and considering moving to a new one? Taking both steps at the same time can be risky. In fact, it might even lead to financial strain, particularly if you, like several other homebuyers, are thinking of using the profit from selling your existing home to purchase your new one. Fortunately, a bridge loan can help you as you go through this process. Continue reading to find out more about bridge loans and
In this section, we will take a look at what bridge loans are and how they work.
What Are Bridge Loans?
A bridge loan is a short-term financing option that gives businesses and individuals the flexibility to borrow money for up to a year. Also known as bridging loans, gap financing, swing loan, bridge financing, and interim financing, bridge loans are obtained through collateral. The collateral can be the borrower’s house or any other asset. Bridge loans generally have interest rates ranging from 8.5% to 10.5%. Thus, they are costlier than conventional, long-term funding options.
Nevertheless, the underwriting and application process for bridge loans is usually quicker than for conventional loans. Moreover, if you are eligible for a mortgage to buy a new house, you can perhaps get a bridge loan, given that you have the required equity in your first house. Because of this factor, bridge loans are an excellent choice for homeowners who need to access funds quickly to buy a new home before they’ve sold their existing property.
How Does Bridge Lending Work?
Usually, when you choose to sell your existing house and buy a new one, you might not be able to secure a contract to sell the home and then close on a new one within the same time period. Moreover, you might not be able to make a down payment on the new house before you get money from the sale of your first house. In such a case, you can apply for a bridge loan against your existing house to make the down payment on your new house.
This basically means that you can work with your existing mortgage lender to get a short-term loan for 6 to 12 months to bridge the gap between the new purchase and the sale of your old house. Keep in mind that not all traditional mortgage lenders offer bridge loans. However, they are mostly provided by online lenders. Nevertheless, bridge homes have a higher interest rate compared to other financing options, such as home equity lines of credit, due to the short loan period.
After you have sold your first home, you can use the money you have received to pay off the bridge loan. Then you will only be left with the mortgage on your new property.
An important thing to note here is that if your house doesn’t sell within the loan period, you will still have to make payments on your first mortgage, the mortgage on your new house, and the bridge loan. Thus, bridge loans are a risky choice for homeowners who are not likely to sell their house in a brief time period.
How Can Bridge Loans Help You?
Here are some of the biggest ways in which a bridge loan can help you.
1. Faster Financing
You can get a bridge loan incredibly quickly, usually in 24 to 48 hours. On the other hand, you might have to wait a month or two to get a business loan or mortgage. Thus, this loan can be extremely helpful in an emergency situation or when you come across an opportunity that’s good to pass.
2. Easy to Secure
Business loans and mortgages usually demand an excessive deal of information, including your or your business’s financial standing, credit scores, proof of income, lending history, etc. However, bridging loans do not require all these details.
As mentioned earlier, bridging loans are a type of asset-backed lending. Thus, there are no extensive checks, and you can secure the loans against the value of an asset.
3. Flexible Repayment
Instead of the bank having the final say in when and how you pay back your loan, lenders offering bridging loans are much more flexible. You can work with the lender to set the interest rates and loan duration to suit your circumstances.
4. No Need for Monthly Repayment
When your finances are tight or when you’re taking up a new project, the last thing you want is to increase your outflows. Bridge loans, unlike mortgages, have quite unique borrowing terms as you don’t generally have to make monthly payments. Rather, you can repay your bridge loan interest when you repay the loan.
Due to this advantage, bridge loan repayments are much easier to manage compared to other similar kinds of debt.
5. No High Fees
A bridge loan typically has higher interest rates but since you can pay it back in a couple of months or weeks means that the interest amount is controlled, and the loan is manageable. You don’t have to stress about monthly rates or increasing interest costs. Rather, your lender is going to share a clear interest structure regarding how you wish to pay the interest.
6. Various Applications
Several traditional lenders and banks are quite specific regarding the intended purposes they’re willing and unwilling to consider when approving loan applications. On the other hand, you can use a bridge loan for almost any purpose! As long as you can prove that you have the ability to repay the loan in the given timeframe, you won’t have to offer any justification.
Applying for a bridge loan can be vastly beneficial depending on your financial position and where you stand in the selling and purchasing process. Just remember to weigh your choices, explore alternatives, and speak with an expert at DFW Specialty Lending.