The Reality of Bridge Loans You Need to Know
Your house is up for sale. Your real estate agent is looking for buyers. In the meantime, you have spotted a property just outside the city that perfect for your kids, pets and is the perfect drive to your office every day. However, it costs more than what you have in savings right now. Since your money is in your previous home that is up for sale, you will not be able to make a move until your agent closes the deal.
So, what do you do? Do you let this amazing opportunity pass because you do not have liquid cash? Of course not! You can opt for a bridge loan that can help you bridge the gap between the sale of your old property and the purchase of your new one. In technical terms, it is an interim financing that is short-term. These are usually ideal for the purchase of new real estate properties.
If you want to sell your current home, and you are sure that a little sprucing up will increase the property value and rake in a good price, you can go for a bridge loan. This kind of a swing loan is very common in real estate. You can get your dream home even before selling off your old property without selling out thousands from your own pocket.
How does a bridge loan work?
If you can structure your bridge loan correctly, you can pay off all your existing liens on your current property, and you can use the excess amount as the down payment for your new home. You can also take out a bridge loan as a second loan on top of your existing liens. In this case, you end up opening a second mortgage. Here, you will be able to use the money as the down payment for your new property.
If you go with the second option, you will end up paying for your old mortgage as well as your new mortgage for the new property. In most cases, this stretches way beyond the budget of any new homeowner. Sometimes, the loan payments take over a year to complete.
This is why we recommend the first option. Your credit counselor can tell you how to structure your bridge loan so that you will not have to make monthly payments on your bridge loan. You will rather be paying the mortgage on your new home. Once your real estate agent manages to sell your old house, you can use the money to pay the interest and the remaining balance of the bridge loan.
Why was bridge loan not as common until now?
Homeowners and home buyers did not need bridge loan until date simply because the real estate market was in better shape. Who needs to take out a loan during a housing boom? It is like one of Houdini’s tricks – you put your house on the market and boom! It gets sold next day.
With deteriorating market rates and the dawn of inflation, selling a property has become challenging. Sellers are facing a lot of difficulty in unloading their old homes and moving on to a better property. This is contributing to the steady rise in the popularity of bridge loans.
What are the benefits of bridge financing?
Interim loans like bridge financing are flexible. In fact, their flexibility is their USP. You can use the money for a variety of purposes. You can meet any and all current expense obligations, including complete the renovation of your old home, use the resource to find new tenants for the house or quickly close on the property that you may have your eyes on.
A bridge loan is a non-recourse loan. This means, your lender can only seek repayment of the loan through the property. You do not have any financial responsibility to pay off the loan. The lender cannot seek more payment from you if the selling value of your old property does not cover the loan amount.
This is indeedvery lucrative given the current state of the real estate industry.
What should you watch out for?
Before you take on a bridge loan, make sure that your lending company does not charge any pre-payment penalties. Although the payments of bridge loans are typically higher than your regular long-term loans, these short-term loans make up for the higher APRs by being more customizable.
Lenders are quite inflexible when it comes to payments. In the case of delayed payments, you will have to pay a steep penalty. This might make completing the payment a lot more difficult for the borrowers.
Many borrowers choose to repay the loan once financing is permanent. However, this also means, the loan gathers interest every month you delay repayment. The net payment becomes a lot more than the borrowed amount.
What is the average fee for bridge loans?
The fees for bridge loans varies from state to state. It also varies considerably on the status of the current real estate market. The total cost of a bridging loan includes a number of small and large fees. Here’s a comprehensive list of the most common fees (as per a mortgage broker) –
- Administration fee
- Appraisal fee
- Escrow fee
- Title policy fee
- Notary fee
- Recording fee
- Courier/wire/drawing fee
- Loan origination fee (depends on the amount of the loan)
The actual price of these charges varies from company to company. However, within the same state, you have more chances of finding competitive pricing. Many loan company websites have interest rate and fee calculators that will show you how much loan amount you are eligible to get, how much your monthly payments will amount to, the details of your interest rate calculation and the list of fees and how the work.
Bridge financing or gap financing is one of the easiest ways to get money when you are thinking of leveling up your housing game. Even when your house is sitting duck in the real estate market, you can move on ahead and start living in your dream home by getting a gap loan to bridge the gap between your sale and purchase. For more information on how much loan amount, you qualify for and by when you can move into your dream house, keep an eye on https://bayareatitleloans.com/.