In 2021, the US housing market saw more activity than any period since 2006. Between January and November, an impressive 6.32 million homes were sold. Over 5.6 million of those were existing homes.
2022 will see a more frenzied housing market. Experts predict that, with inventory still scarce, home prices will rise by 11 percent. These record-fast rising prices mean that buyers and real estate investors need to be well prepared, especially when it comes to financing home purchases.
For a homeowner who wants to buy and move to a new house this year, a bridge loan may just be the ideal way to go. These loans are also perfect for real estate investors who specialize in flipping homes.
But exactly what’s a bridge loan, and how does it work? What are the strengths and drawbacks of this financing option? Keep reading to find out.
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What Is A Bridge Loan?
A mortgage bridge loan refers to a loan that’s meant to offer financing during a transitionary period. Most homeowners who take out bridge loans do so to finance the purchase of a new home. They’re selling their old home and transitioning to a new one.
A bridge loan is typically secured by your existing home as collateral. You can use the loan to close on another home as soon as you sell your current one. These loans are typically short-term, with many requiring them to be paid back within 6 to 18 months.
For real estate investors, bridge loans work exactly like fix-and-flip loans. The loan helps you purchase and renovate a property that you’ll then sell at a profit and pay back the loan.
How Does A Bridge Loan Work?
Borrowers have a couple of options when it comes to bridge loans. The majority of lenders package the loans in two ways:
Hold Two Loans
In this arrangement, the lender gives you the difference between your current mortgage balance and up to 80 percent of your property’s value. You can use the funds you get to pay the downpayment for the home you want to buy while still keeping your first home loan. In this case, you have to pay both the bridge loan and the remainder of your current mortgage.
Roll Both Home Loans Into One
With this bridge loan solution, the lender gives you one large loan, usually up to 80 percent of your current home’s value. With the money you get, you pay off your first mortgage’s balance, then apply the balance toward paying the downpayment of your next house.
Whether you opt for the first or second option when taking out a bridge loan, note that the terms and conditions will vary from lender to lender. However, some characteristics cut across all bridge loans, such as the fact that they are short-term and are secured by your current home.
When it comes to applications, the process is generally similar to the one for conventional mortgages. Most lenders will want to evaluate your creditworthiness before approving the loan.
Why Should You Opt For A Bridge Loan?
Before you take a bridge loan, it’s important to know whether or not it’s a good move. Bridge loans can prove beneficial in many ways.
For instance, with a bridge loan, you get money in your account quickly. Most top lenders disburse the money in a matter of days, which is usually much faster than conventional loans. With bridge loans, you’re thus assured of getting money quickly to use for time-sensitive operations.
Borrowers also enjoy payment flexibility. For instance, you can take advantage of deferred loan payments until you sell your current home. Some lenders will also accept interest-only payments.
Another benefit is that with a bridge loan, you don’t need contingency. That means you won’t need to place a contingency on the new home you’re purchasing because your current house must sell before you can pay for it. Since you already have the funds provided by the contingency loan, you can settle on the new house before the old one sells.
Drawbacks Of Bridge Loans
Bridge loans have their drawbacks too, and it pays to be aware of them before paying a visit to potential lenders.
Perhaps the biggest one has to do with the rates. Bridge loan rates tend to be a little higher compared to conventional mortgages. Given that these loans are typically short-term, it only makes sense that their interest rates would be higher.
There’s also the risk of ending up with two homes if your current home doesn’t sell or takes too long to do so. That means double home management costs, besides making payments for two loans.
When Should You Consider A Bridge Loan?
For many people, the ideal scenario is to wait to sell their current home and use the money to purchase a new house. But there are situations when you need to purchase a new house before you sell your current one. If you don’t have the money to fund the purchase of a new home, taking a bridge loan can be an ideal move.
A bridge loan is also perfect if you find a home you like, but the seller won’t accept a contingency offer for you to sell your old home first. You may also opt for the loan if you find that it’s difficult to come up with the downpayment for a new home purchase without selling your current home.
A Bridge Loan Can Make All The Difference When Buying A New Home
A bridge loan can be a game-changer for someone who wants to purchase a new home but doesn’t have the funds to proceed with the purchase. The loan can ensure that you don’t need to wait until your current home sells before securing a property you like.
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