The Definition of Bridge Loans
If you’ve dabbled in real estate, have dipped your toes in homeownership for some time, or are just beginning your journey into the vast financial world, chances are you’ve heard the term “bridge loan”. A bridge loan’s meaning is central to real estate, defined by a loan taken out by buyers in order for them to purchase another home before they sell their existing home. Essentially, bridge loans allow homeowners to bridge the financial gap between their new home and the old one.
How Bridge Loans Work
The underwriting behind a bridge loan doesn’t follow the same method of approach as a traditional loan would. Not all bridge loan lenders establish minimum FICO scores for borrows or debt-to-income ratios, instead, these lenders look to see what will make the most sense when setting guidelines and structuring the term financing. Bridge loans allow homeowners to basically borrow the down payment on their new home in the event that their old one has not sold at the time of closing.
Rates vary among lenders and for the most part, are also determined by geographical location, so interest rates can’t really be pinned down. Bridge loans may not carry any payments for the first few months, but the loan will be paid when the property is once sold and there could be fees and interest by then. One fee your bridge loan may include is a loan origination fee, which is often based on the amount of the total loan.
A bridge loan example would be if your current home is $300,000 with a mortgage of $150,000 balance remaining, and your new home is $450,000. A bridge loan lender or private money lender could give you 80% of the loan-to-value ratio of your current home to pay your current mortgage and go to the closing costs for the bridge loan and down payment on the new loan.
The Benefits & Disadvantages of Bridge Loans
Bridge loans are temporary loans, and at this point, you may be wondering what the collateral will be if you decide to utilize this method of financing. These loans will be secured by your existing home, the one you intend to move out from. As with any form of loans, there are benefits and drawbacks that come with them.
What draws homeowners to utilize bridge loans is the few months of free payments they may gain with a bridge loan, the ability to purchase their new dream home, putting their old house on the market without restrictions, and being able to buy a new home even after the contingency to sell under certain terms is removed. Bridge loans allow for the freedom to jump on a house that’s on the market without having to worry about selling your old home right away, which in a competitive real estate market, is a priceless perk.
Drawbacks of bridge loans can include that this form of financing can be more expensive than a home equity loan—but not always. You just have to have a sharp eye for contracts and fine print or find the right bridge loan lender or private money lender with competitive rates. On your end, you’ll also be able to qualify to own two homes, as that’s the purpose of a bridge loan—bridging together the gap from your older home to the new home you plan on moving into. For some, bridge loans aren’t always the right answer, as being responsible for paying two mortgages can be stressful. However, the positive side of bridge loans is that hard money lenders are more flexible than traditional banks, offering better financing and terms.
Contact Gelt Financial today for your bridge loan needs!